LVR Restrictions

Posted by Andrew Nicol on 22/07/16
LVR Restrictions NZ
What are the LVR restrictions?

What LVR Restrictions Are

LVR restrictions limit the amount of low-deposit mortgages banks can provide to borrowers.

They are introduced and put in place by the Reserve Bank, which is the bank that sets the lending rules for all of the other 'retail' banks.

This means that when LVR restrictions are in place, homebuyers and property investors are required to have more of a deposit than they would otherwise need.

This is meant to limit the number of potential buyers in the property market, weakening demand and softening house price growth.

There are several rules and exemptions, which we'll thoroughly explain in this article.

Current Restrictions

Current LVR Rates

The current Loan to Value Ratio restrictions in New Zealand are:

  • 80% of each bank's lending to owner-occupiers must use a 20% deposit or higher, and
  • 95% of each bank's lending to property investors must use a 30% deposit or above.

This means it's still possible to secure a home loan with less than the LVR restrictions, there is just a limit to how many of these types of loans the banks can lend.

A key exception (though we'll discuss this later) is that brand new properties are not subject to the LVR restrictions.

It is up to each bank to decide how much they're willing to lend on a brand new property. As a general rule, however, a newly built home requires a 20% deposit.

Calculating How Much Your Can Borrow

How to Calculate Your Maximum Purchasing Power Using the LVRs

Let's say you have a deposit of $100,000. How much would you be allowed to borrow and still be within the LVR restrictions?

The formula is:

Deposit / LVR Restriction = Maximum Purchasing Power

For instance, say you are an investor, the formula would be:

$100,000 / 0.3 = $333,333 of purchasing power

Note that dividing your deposit by 0.3 is the same as dividing it by 30%.

The $333,333 of purchasing power the investor can spend is made up of $100,000 deposit and $233,333 of lending.

Now let's say you were an owner-occupier. The formula would then be:

$100,000 / 0.2 = $500,000 of purchasing power.

That purchasing power is made up of $100,000 deposit and $400,000 worth of lending.

This small example shows how much of a difference a 20% LVR restriction and a 30% LVR restriction can make.

In this example, both the owner-occupier and the investor has the same $100,000 deposit. However, the owner-occupier can borrow over $176,000 than the investor.

This means investors are significantly disadvantaged by the LVR restrictions (some Kiwis would say that is no bad thing).

History of LVRs

History of LVR Restrictions in New Zealand

On October 1st 2013, the Reserve Bank of New Zealand introduced Loan to Value Ratio restrictions for the first time. The Reserve Bank governor at the time, Graeme Wheeler, wanted to slow house price growth, particularly in the Auckland property market.

However, the measures did not slow Auckland house price increases, and house price inflation continued for another 3 years.

LVR restrictions were strengthened in 2016. At this time, investors were then required to pull together a 40% deposit to purchase an existing property. These measures were then relaxed to 30% for investors, where they currently sit today.

The LVR restrictions were always intended to be a temporary measure to calm a period of rampant house price inflation.

There have been calls from well-known property commentator, Ashley Church, suggesting that all LVRs should be dropped due to lack of effectiveness.

And there has been speculation among some economists that the LVR restrictions may be relaxed shortly.

The Impact of LVRs on the Market

How LVRs are Meant to Impact the Property Market

Loan to Value Ratio restrictions don't impact all buyers within the market, just buyers 'around the edges' who are highly leveraged or at the margin.

Although LVRs only impact some groups, taking a small number of buyers out of the market (or decreasing their purchasing power) helps to take the heat out of the whole market. This slows house price growth.

Let's look at a couple of examples:

First Home Buyer Locked Out of the Market

Jenny is a first home buyer who has saved a $50,000 deposit, along with her partner, Steve.

Without any LVR restriction, Jenny and Steve might secure a 10% deposit home loan. That would mean the couple would have purchasing power of up to $500,000.

This is enough to purchase a reasonably nice 3 bedroom home in their home city of Christchurch.

However, if Jenny and Steve have to comply with the 20% LVR restriction, they only have purchasing power of up to $250,000.

This is not enough to buy a home in Christchurch that suits their needs or tastes. So, Jenny and Steve are locked out of the market.

Buyers who are still in the market for properties Steve and Jenny would go for now have less competition. This softens housing demand and house price inflation slows.

If Jenny and Steve want to enter the market, they will need:

  • to secure lending that falls outside of the LVR restrictions
  • to increase the size of their deposit, perhaps with the help of the bank of Mum and Dad
  • to use one of the LVR exemptions

Second Home Buyer Limited in What they Can Offer

Jeremy bought his first property 2 years ago in Wellington. It was a tiny shoebox apartment in the central city. But, despite its limited market, it's gone up in value gradually each year.

Now that Jeremy and his partner plan to adopt, the couple wants a larger home to provide for their growing family.

He currently has $150,000 of equity within his apartment that he can use towards his deposit, and has started looking at properties in the $725,000 - $750,000 range.

Under the LVR restrictions, Jeremy's $150,000 deposit will be enough to secure a mortgage up to $600,000, giving total purchasing power of $750,000.

While Jeremy is still able to afford a home in his price range, he is limited to how much he can compete with other buyers.

This limits Jeremy's purchasing power Jeremy and decreases competition in the market, dampening house prices.

High Deposit Buyer Who It Not Impacted

Lastly, let's look at Barbara and Bruce. This couple 'buy and flip' properties, doing them up to sell at a profit.

They've been in the game for a while and prefer to use a large deposit to limit their interest payments while they renovate each property.

They're looking in the same price range as Jeremy from our last example ($725,000 - $750,000).

However, because they have a $300,000 deposit, they have no concerns about the LVR restrictions.

Why is that?

With a $300,000 deposit, Barbara and Bruce have purchasing power of $1,000,000.

Although they don't want to spend this much, if they have to pay $770,000 for a house that is "worth" $750,000 they'll be able to do so and outbid Jeremy.

Barbara and Bruce are not impacted by the LVR restrictions.

LVR Exemptions

How to Get Around the LVR Rules with Exemptions

There are several exclusions from the LVR Restrictions:

1) New Builds | Making it Easier For New Homes to Be Built

The most notable exclusion is that new properties bought by investors are exempt from the 30% restriction. This means investors can access the market using a 20% deposit (common) or lower (less common, but still happens).

Take the example of a $500,000 property. If it was an existing property it would require a 30% deposit for investors to acquire the property – $150,000. However, if it was a brand new property (potentially bought off the plans), then only a $100,000 deposit is typically required.

Although new investment properties are typically bought with a 20% deposit, the Reserve Bank does not prescribe a minimum deposit level for a brand new property.

This means that it is up to each individual bank to determine the levels of deposit they are willing to lend at.

2) Remediation Exemptions | Helping Porperties Come Up To Code

If a buyer has acquired a property that is not up to current building codes or residential tenancy laws, they can borrow above the restrictions to put the property right.

Let's pretend an investor bought an existing property with 70% lending and the property did not meet the standards set under the Healthy Homes Act. The investor's bank can lend additional funds so the investor can bring the property up to code.

This would push the investor's LVR above the 70% limit.

3) First Home Loans | Helping First Home Buyers Into the Market

To help first home buyers into the market, the previous National government introduced First Home Loans (previously called Welcome Home Loans). These loans allow first home buyers to purchase property with as little as a 5% deposit. These loans are exempt from the LVR restrictions.

To be eligible for a Welcome Home Loan, the borrower must:

  • Be purchasing their very first home (or qualify as a second-chancer)
  • Have earnt income of less than $85,000 over the last 12 months (if buying by themselves), $130,000 collectively over the last 12 months (if buying as a couple), and $180,000 collectively over the last 12 months (if buying as a group ... i.e. 3 or more people)
  • Be purchasing a property underneath the regional house price limits

4) Bridging Loans | Allowing Homeowners To Get By Temporarily

Short-term bridging loans where an owner-occupier is purchasing a new property to live in before the sale of their current residence are exempt from the LVR rules.

5) Refinancing | Ensuring There Is Still Competition Between Banks

Refinancing of your existing residential mortgage (switching banks) is exempt from high LVR restrictions, as long as the loan balance does not increase.