How Do Loan to Value Ratio Restrictions Work in NZ?

Everything you need to know about LVRs and how they work in New Zealand. Last updated 15.12.20

What are the LVR restrictions?

What LVR Restrictions Are

Loan to Value Ratio restrictions limit the amount a bank can lend against individual property.

For instance, a bank may only lend you up to 70% of a property's purchase price. That means you'll need the other 30% of the value as a deposit.

The amount a bank will lend – and therefore, the amount of deposit you need – can change from time to time based on each bank's individual policies.

And each bank may lend you a different amount for the same property.

At the same time, the Reserve Bank will set blanket rules that all banks need to follow. And then each individual bank can decide whether they put even stricter policies in place.

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

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

The Reserve Bank's Current Restrictions

Current LVR Rates From The Reserve Bank

Right now, there is no Loan to Value Ratio restriction in place, set by the Reserve Bank.

The Reserve Bank removed LVR restrictions in late April 2020 as part of the central bank's Covid-19 response.

However, the bank is currently consulting with the public and retail banks to bring these restrictions back in from March 2021.

We don't know what the new deposit requirements will be. However, we expect they may look similar to the restrictions that were in place before they were taken away.

The Loan to Value Ratio restrictions before April 2020 were:

  • 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.

If these restrictions were brought back into effect, it would still be possible to secure a home loan with less than the LVR restrictions. However, it would be more challenging to secure a lower-deposit loan.

An important exception that was previously in place (and we'll discuss this below) was that brand new properties were not subject to the LVR restrictions.

It was left up to each bank to decide how much they were willing to lend on a brand new property. But, as a general rule, a newly built investment property has required a 20% deposit in the past.

The Retail Bank's Current Restrictions

Current LVR Rates From Retail Banks

We are currently in a period where LVRs are not in place ... but we know they will be by March. This has caused the main retail banks, like BNZ and ANZ, to introduce their own internal LVRs.

These restrictions change by the day, and each bank treats them differently.

For instance, the day this article was released, ANZ introduced a 60% Loan to Value Ratio restriction on new investor lending. That policy requires landlords to have a 40% deposit for any new properties that they buy.

They are, however, allowing investors to buy new properties with just a 20% deposit.

If you are unable to purchase a property through these main banks, you may still be able to get finance. In this case, you may need to talk to a non-bank lender.

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

How to Calculate Purchasing Power When Loan to Value Ratio Restrictions Are In Place

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

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

Example of Purchasing Power For an Existing Property With LVRs

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 borrowing 80% of a property's value. The formula would then be:

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

Example of Purchasing Power For a New Property With LVRs

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

This shows the difference a 20% deposit requirement can make vs a 30% deposit requirement.

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

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.

That is part of the reason why the reintroduction of LVRs is unlikely to significantly dampen house price inflation. In the Reserve Bank's consultation papers, released in December 2020, the expected impact is to lower house price inflation 1-2% below what it would otherwise be.

How the LVR Loan to Value Ratio Restrictions Will Impact the NZ 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.

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 35%, and then 30% for investors.

These were removed 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.

Timeline of Loan to Value Ratio LVR Restrictions in NZ

Concerned about the level of 'low-deposit' lending being offered to investors, the Reserve Bank has announced that they will reintroduce these restrictions from March 2021.

Retail banks have responded by putting in place their own stricter deposit-requirements. Many banks require higher deposits than the regulations actually require.

LVR Exemptions

How to Get Around the LVR Rules with Exemptions

Last time the Loan to Value Ratio restrictions were in place, there were several exemptions, where low deposit loans were still possible:

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

The most notable exclusion is that new properties bought by investors were exempt from the 30% restriction. This meant that investors could purchase an off-the-plan turnkey property using a 20% deposit (common) or lower (less common, but still happened).

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

If an investor buys the existing property, they require $150,000 as a deposit. But, if they instead decide to purchase the brand new property, they'll only require a $100,000 deposit.

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

Right now, even as retail banks require higher deposits for investors, many are still lending on new properties with just a 20% deposit.

The 5 LVR Exemptions In NZ

2) Remediation Exemptions | Helping Properties Come Up To Code

Under the previous LVR restrictions, if a buyer 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 bank can then lend additional funds to the investor so they can bring the property up to code.

This would push the investor's lending on the property above the 70% 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. These loans were exempt from LVR restrictions previously, and are expected to be again under the new 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 their next property to live in before the sale of their current residence were also exempt under the previous 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 of your existing residential mortgage (switching banks) was and is also likely to be 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

How LVR exemptions can impact individual buyers

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 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 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

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 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.

The LVR restrictions do not impact Barbara and Bruce.