Are you in the market for a property? Then, you may have heard people talk about Reserve-Bank-enforced ‘LVRs” (loan-to-value restrictions).
These three letters can affect your plans, by determining what you can afford to spend on your next property purchase. Let’s see how.
What are LVRs?
Reserve Bank-enforced LVRs are one of the macroprudential tools available to the central bank when it sets monetary policy.
They were first introduced in 2013 and have been tweaked many times since then – including being lifted entirely for almost a full year when Covid-19 first hit in New Zealand.
What do they do?
The rules limit the amount of low-deposit lending that banks can do to both owner-occupiers and investors. They only apply to banks, not non-bank lenders.
Before they were introduced, about 25 per cent of all new bank lending was to people with a deposit or equity of less than 20 per cent. By the end of 2020, it was less than 10 per cent.
What are they for?
While people often talk about LVRs being used to “slow the housing market” or reduce prices, the main aim of the restrictions is to ensure that banks aren’t over-exposed.
It’s important to note that the Reserve Bank doesn’t actually have a mandate to moderate house prices. The rules ensure that large numbers of people aren’t taking on loans with small deposits that could leave them in negative equity (with a property that’s worth less than what they owe) if prices were to fall.
The Reserve Bank says the limits mean that household and bank balance sheets are more resilient to a correction in the property market. “Neither the long-run level of house prices nor housing affordability are objectives of the LVR restrictions. However, by limiting highly leveraged purchasing, LVR restrictions may moderate house price volatility somewhat,” it says.
How do they work?
Banks are given a percentage of loans that they can issue to people who do not meet the LVR rules. Most recently, banks have been allowed to lend up to 20 per cent of new loans to owner-occupiers with deposits under 20 per cent, and 5 per cent of new lending to investors with equity under 30 per cent.
In practice, regardless of LVRs, banks can introduce their own more stringent rules because they do not want to get close to the threshold.
Can you get around them?
As well as the amount of lending that banks are allowed within the rules, there are other ways to get a loan with a small deposit.
Non-bank lenders aren’t covered by the LVR rules and are often willing to deal with borrowers who do not currently meet the banks’ criteria. People sometimes choose a non-bank loan with the aim of eventually refinancing to a bank.
You are also exempt from the rules if you are borrowing to build a new home or are buying one that has just been constructed. Get in touch if you’d like to explore your options.
Like to know more?
Wondering how to navigate the rules? We can help you work out an appropriate strategy to get a “yes” from a lender. Get in touch today and we will talk you through the options available.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.