7 Things You Need to Now About LVR Restrictions in NZ

Everything you need to know about LVR restrictions and how they work in NZ.
Last updated 29.09.21

Ed McKnight

Ed McKnight

Economist, property investor and host of the Property Academy Podcast
Introduction

What Are the LVR Restrictions?

Property investors and homebuyers need to understand Loan to Value Ratio restrictions (LVRs). That’s because these rules dictate how much a bank can lend you for a property.

They are set by the Reserve Bank of New Zealand, the government organisation that makes the rules for all commercial banks (like ASB, BNZ, ANZ and Westpac).

Let’s go through an example to see what we mean.

Say that a bank can only lend you up to 60% of a property's purchase price.

That’s the LVR restriction. But the flip side of that is – if the bank will only lend you 60% of the money for a property – you'll need to come up with the other 40% as a deposit.

Therefore LVRs set how much of a deposit that you need to purchase a property.

The Reserve Bank's Current Restrictions

1) What Are The Current LVR Restrictions From The Reserve Bank?

Right now, owner-occupiers require a 20% deposit to purchase a property within the LVR restrictions.

Said another way, banks can lend up to 80% of a property’s value to an owner-occupier.

Property investors, on the other hand, require a 40% deposit when purchasing an existing property.

Similarly, that means that banks can lend up to 60% of the value for an existing property.

But, it is essential to note that not all lending needs to come under these restrictions. The banks still have the discretion to lend money to some borrowers with lower deposits.

For owner-occupiers, only 90% of the bank’s lending needs to come within the LVR restrictions. That means about 1 in 10 loans can be given out to borrowers with a lower deposit (say 10%).

For investors, it is more strict. 95% of the bank’s lending to investors needs to come within the LVR restrictions.

And in practice, very few low-deposit loans to investors are approved.

But, there is an important exception to these rules. New Builds do not come with these restrictions. They are exempt from the limits.

That means that the banks will often lend up to 90% of a New Build’s value for a first home buyer and up to 80% for a property investor.

Calculating How Much Your Can Borrow

2) How Do I Calculate How Much I Can Afford Under 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

LVR Restriction nz & LVRs NZ – How to calculate purchasing power

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

$100,000 / 0.4 = $250,000 of purchasing power

LVR Restriction nz & LVRs NZ – How to calculate purchasing power

Note that dividing your deposit by 0.4 is the same as dividing it by 40%.

The $250,000 of purchasing power the investor can spend is made up of a $100,000 deposit and $150,000 of lending.

Now let's say you were an owner-occupier borrowing 80% of a property's value. The formula would then be:

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

LVR Restriction nz & LVRs NZ – How to calculate purchasing power

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

This shows the difference a 20% deposit requirement can make vs a 40% deposit requirement.

In this example, both the owner-occupier and the investor has the same $100,000 deposit. However, the owner-occupier can borrow $250,000 more than the investor.

That makes investors significantly disadvantaged by the LVR restrictions compared to owner-occupiers (some Kiwis would say that is no bad thing).

The Impact of LVRs on the Market

3) What Impact Will The LVR Restrictions Have on 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.

That is part of the reason why the reintroduction of LVRs in May 2021 had little impact to significantly dampen house price inflation.

In the Reserve Bank's consultation papers, released in December 2020, they expected the impact of the LVRs to only lower house price inflation 1-2% below what it would otherwise be.

LVR Restriction nz & LVRs NZ – Impact on Property Market

The consultation paper said:

"We consider a reasonable estimate of the impact on house prices of reinstating LVR restrictions on 1 March 2021 would be a reduction in house prices of 1-2 percentage points, relative to a counterfactual in which the LVR restrictions remained off."

That means that if house price inflation was going to be 10% without the LVR restrictions, then house prices are likely to go up 8-9% over the same period.

It’s interesting to note that since these restrictions have been reintroduced, house prices have still risen 5.4% in only 3 months.

In other words, so far they appear to have had little effect.

History of LVRs

4) How Long Will The LVR Restrictions Stay The Way They Are?

It’s crucial to understand that LVRs change constantly. Since we first wrote this article in 2020, the LVR restrictions have changed 3 times.

The Reserve Bank of New Zealand introduced Loan to Value Ratio restrictions for the first time in October 2013.

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 35%, and then 30% for investors.

The restrictions were removed altogether in April 2020 as part of the Reserve Bank's response to Covid-19. However, house prices have skyrocketed since the country came out of lockdown and through the rest of 2020.

In March 2021, they were brought back in. At the time, investors required a 30% deposit.

They have then strengthened again in May 2021, where they sit today – with investors requiring a 40% deposit.

LVR Restriction nz – History of LVRs in NZ
LVR Exemptions

5) How Can I Use the LVR Exemptions To Buy With a Lower Deposit?

There are several exemptions where low deposit loans are still possible:


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

The most notable exclusion is that New Builds bought by investors are exempt from the 40% LVR deposit requirement. This means that investors can purchase an off-the-plan turnkey property using a 20% deposit (common) or lower (less common, but still happens).

Take the example of two $500,000 properties standing side by side. One is existing, and one is a new build.

If an investor buys the existing property, they require $200,000 as a deposit. But, if they instead decide to purchase the brand new property, they'll only need a $100,000 deposit.

This exemption makes brand new properties more attractive to investors; this encourages more houses to be built.

LVR Restrictions in NZ – Exemptions

2) Remediation Exemptions | Helping Properties Come Up To Code

Under the LVR restrictions, if a buyer acquires a property that is not up to current building codes or residential tenancy laws, they can borrow above the limits to put the property right.

Let's pretend an investor bought an existing property with 60% lending. The property did not meet the standards set under the Healthy Homes Act. The bank can then lend additional funds to the investor to bring the property up to code.

This would push the investor's lending on the property above the 60% limit, but the Reserve Bank would allow this to happen. This means that the quality of New Zealand's housing stock isn't harmed by the restrictions being in place.


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.

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

  • Be purchasing their very first home (or qualify as a second-chancer)
  • Have earnt income of less than $95,000 over the last 12 months (if buying by themselves), $150,000 collectively in the previous 12 months (if buying as a couple),
  • Be purchasing a property underneath the regional house price limits

This means that eligible first home buyers can still borrow at lower deposit amounts.

Remember, even if you don’t qualify for a First Home Loan, you still may be able to purchase with a low deposit. Your loan will just need to fall under the 10% of loans to owner-occupiers that can fall outside the LVR restrictions.

4) Bridging Loans | Allowing Homeowners To Get By Temporarily

Short-term bridging loans where an owner-occupier is purchasing their next property to live in before the sale of their current residence are also exempt under the rules.

This is because bridging finance is only temporary, so it doesn't present an issue to a bank's long term financial stability.

5) Refinancing | Ensuring There Is Still Competition Between Banks

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

This ensures that there is still competition between banks, and you don't have to stick with a bank you don't want to.

Examples of Impact on Buyers

6) How Might the LVR Restrictions Impact Me?

Let's look at a couple of examples of how LVR restrictions can impact individual buyers.

First Home Buyer Locked Out of the Market

Jenny is a first home buyer. Between herself and her partner, Steve, they have saved a $50,000 deposit.

Without any LVR restriction, Jenny and Steve might secure a 10% deposit home loan.

That would mean the couple can purchase a property up to the value of $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 can only buy a property worth 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 can still purchase the sort of properties that Steve and Jenny would have gone after now have less competition. This softens housing demand, and house price inflation slows compared to what it would otherwise.

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

  • to secure lending that falls outside of the LVR restrictions (this is generally possible for first home buyers)
  • 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, e.g. First Home Loan



Second Home Buyer Limited in What they Can Offer

Jeremy bought his first property 2 years ago in Wellington. It is 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 plans to sell his apartment and use the money as a deposit for his next home.

After selling the property and paying the real estate agent, he’ll be left with $150,000 of equity. So he 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 can still 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 and decreases competition in the market, dampening house prices.



High Deposit Buyer Who Are 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 while renovating each property. This helps to lower interest costs.

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

However, because they have a $400,000 deposit, they have no concerns about the LVR restrictions.

Why is that?

With a $400,000 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.

The LVR restrictions do not impact Barbara and Bruce.

Banks Taking Action On Their Own

7) When Else Will I Need a Larger Deposit?

Even though the Reserve Bank sets the minimum level of deposits required, sometimes banks will put their own, more stringent rules in place.

This happened before the latest round of LVR Restrictions were introduced from the Reserve Bank.

At the time (December 2020), there were no LVR restrictions in place. However, individual banks decided to take action and put a 40% deposit requirement in place for investors.

Banks also have stricter internal requirements, especially for leasehold properties and smaller apartments.

For instance, some apartments with less than 55 square metres will require a 35% deposit for owner-occupiers through some banks.

In some instances, if an investor wants to purchase a dual-key apartment (an investor-specific property), they require a 50% deposit.

FAQs

Frequently Asked Questions About The LVR Restrictions

What does LVR stand for?

LVR stands for Loan to Value Ratio. It measures the amount of debt a property (or asset) has compared to its worth.

If you have a property worth $500,000 and it has a mortgage of $250,000, then the LVR is 50%.

What is an LVR Restriction?

An LVR restriction is where the Reserve Bank bans the commercial banks, e.g. ASB, from lending above a particular LVR.

In NZ, 90% of each bank’s lending to owner-occupiers needs to be at an LVR of 80% or lower.

For property investors, 95% of bank lending needs to be at 60% or less.

How do I calculate LVR?

LVR is calculated by taking a property’s mortgage and dividing it by its value.

LVR = (Mortgage / Property Value ) x 100

For instance, if you have a mortgage of $250,000 and a property worth $500,000, the LVR is 50% i.e. ($250,000 / $500,000 ) x100 = 50%.

Or you can always use our LVR calculator to quickly run your numbers.

What is the LVR for first home buyers in NZ?

Under the LVR restrictions, first home buyers can borrow up to 80% against the value of a property.

However, there are ways to borrow outside of the LVR restrictions.

10% of bank lending to owner-occupiers can also be outside of these restrictions.

And some first home buyers can access the government’s First Home Loan. In this scenario, a first home buyer can buy a property using just a 5% deposit. However, that is subject to bank approval, which rarely happens with just a 5% deposit.

In practice, it is common for a first home buyer to use a 10% deposit. And 38% of first home buyers use less than a 20% deposit to get started.

Can I borrow more than 80% for a property?

Owner-occupiers – people purchasing their own home – often can. However, property investors usually cannot.

An owner-occupier can borrow over 80% either by:

  • Using a government-backed First Home Loan (criteria applies)
  • Securing a loan that falls out of the LVR restrictions, i.e. in the 10% of loans a bank can lend to owner-occupiers outside the restrictions
  • Or by working with a non-bank lender – who aren’t subject to the LVR restrictions.

What does 80% LVR mean?

80% LVR means that the mortgage on a property makes up 80% of the property’s value.

For instance, a $500k property with an 80% LVR means the mortgage is $400,000.

What’s the difference between the Reserve Bank and a Commercial Bank?

Commercial banks are businesses like ASB, ANZ, BNZ and Westpac. These banks lend out money for mortgages and give you regular transaction accounts.

The Reserve Bank sets the rules and regulations for commercial banks. They ensure that the monetary system stands up and that the other banks don’t take on too much risk.

Ed McKnight

Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.