It will now be easier for New Zealand home buyers to secure a bank loan after the NZ Reserve Bank removed the loan-to-value ratio (LVR) funding restrictions on mortgage lending. LVR refers to the percentage of the property the bank owns or how much of the property is covered by mortgage. For example, if your house is worth $500,000 and your mortgage is worth $300,000, your LVR is 60 per cent because the mortgage is worth 60 per cent of the total house price.
$300,000 ÷ $500,000 = 0.6 x 100 = 60%
The restrictions to LVR, which were first introduced in October 2013, prevented banks from lending more than 20 per cent of their residential mortgage book to owner-occupiers who didn’t have at least a 20 per cent deposit. In other words, the restrictions prevented home owners from having more than 80 per cent of their home mortgaged. It also stopped banks from lending more than 5 percent of their book to investors who didn’t have a 30 per cent deposit.
What does the removal of the LVR restrictions mean?
Effective from 1 May, 2020, banks have no restrictions on the amount of money that they can lend to high-loan-to-value-ratio borrowers (a mortgage of 80 per cent or higher). By removing the LVR, the Reserve Bank is hoping to avoid potential issues if house prices drop and boost demand for property as the country comes out of lockdown caused by the Covid-19 pandemic.
Reserve Bank deputy governor, Geoff Bascand, said they received more than 70 submissions for the proposed changes. “The feedback raised a number of valid points and concerns which were all carefully considered. Removing LVR restrictions now supports financial stability by removing one potential obstacle to the flow of credit in the economy, helping to soften the downturn.”
How the removal of LVR restrictions will help first home buyers
It’s important to note that just because banks can lend more money, doesn’t mean they will. However, as long as you’re considered a credit-worthy applicant and you have enough income to meet the bank’s criteria, you will be able to access a mortgage loan a little easier. The removal of the LVR restrictions means banks should be able to lend money to any first home buyer that meets their income and credit requirements. You’ll now be able to choose the bank that best suits your circumstances, rather than choosing the one that has enough money to lend.
The LVR funding restrictions had not been applied to new-builds because the Reserve Bank wanted to encourage new construction and the purchasing of higher-quality, healthier homes. It will now be just as easy to finance existing homes as it is to finance new-builds.
What changes are likely for investment property buyers?
Banks carry higher risks with higher LVR lending and their main concern is if an owner stops paying their mortgage. As more properties are added to a portfolio, the risks grow for the banks. Until the banks have a better understanding of the property market post-Covid-19, they’re unlikely to change the LVR requirements for investment property. They’re also unlikely to lend over 70 per cent on an investment property until they’re comfortable the market has been stabilised and isn’t going to drop.
Will they remove Low Equity Fees and Low Equity Margins for high LVR buyers?
At the moment, a high LVR means you’ll pay either a one-off fee at the time of settlement or additional interest on your mortgage. The likelihood of these being removed is low as banks take a huge risk on high-LVR mortgages which need to be compensated for. Interest-only restrictions are also unlikely to be removed for the same reason as banks need mortgages to be paid down so they can lend that money out to another homebuyer and spread their risk.
The removal of LVR funding restrictions is great news for financially secure first home buyers and gives them more choice in banks. Applicants will still need good and provable income, but will no longer need to save the whole 20 per cent deposit. The Reserve Bank will review the policy in 12 months.