Since October 2013, when the Reserve Bank of New Zealand (RBNZ) first introduced loan-to-value ratio restrictions (LVR), home buyers in New Zealand have been grappling with deposit requirements. LVRs play a vital role in home loan assessment and can determine how much home buyers may be able to borrow from a lender. In this comprehensive guide, find out what LVRs are and what exemptions may apply, how LVRs impact home buyers, and how to get around LVRs.
What is Loan-to-Value Ratio (LVR)?
A loan-to-value ratio (LVR) is a measure of how much a bank will lend against a mortgaged property, compared to the value of that property. Banks use LVR to assess the risk of a home loan: the higher the LVR, the higher the risk to the lender. Essentially, LVRs tell the home buyer how much deposit they need to get a mortgage.
LVR can be calculated by dividing the loan amount by the value of the property and multiplying by 100. For example: A property valued at $500,000 (your deposit is $100,000), borrowing $400,000 gives you an LVR of 80%.
$400,000/$500,000 x 100 = 80%
How does LVR impact lending?
LVR restrictions imposed by the RBNZ set a “speed limit” on how much low-deposit / high-LVR lending banks can do. That means home buyers and property investors who don’t meet LVR requirements could be charged higher interest rates or additional fees by the lender to cover any perceived risk.
|
Type of buyer |
Deposit / LVR |
Lending restriction |
|
First Home Buyer |
Generally, a 20% deposit / LVR of 80% is required. |
Banks are limited by the RBNZ and can only lend 15% of total mortgages for owner-occupied residential property to first home buyers with an LVR up to 90% or a deposit less than 20%. |
|
Property Investors |
Generally, a deposit of 35% / LVR of 65% is required. |
Banks are limited to 5% of new investor lending to investors with an LVR of more than 65% or a deposit of less than 35%. |
How do you get around LVRs?
LVRs and deposit requirements can make it harder for home buyers and property investors to buy property. But that doesn’t mean the end of the road. There are still lending options for low deposit / high-LVR home buyers and there are exemptions to LVR restrictions.
- Banks can accept some low deposit lending so even with a low deposit you may still qualify for a home loan. Factors like a secure job, good income and low debt could work in your favour, so it’s worth discussing your situation with a mortgage adviser to get advice for your home loan application.
- Non-bank lenders are not restricted by LVRs and often have more relaxed lending requirements and competitive interest rates. Often these lenders can offer solutions to home buyers who have previously been turned down by the bank.
- Loans to borrowers building new homes, or for newly built homes, are exempt from LVR restrictions, and with many smaller homes and apartments being built, this may open up opportunities for both first home buyers and property investors.
- Home buyers accessing home loans through Government’s First Home Loans are exempt from LVR restrictions and may qualify for a home loan with as little as 5% deposit.
- Bridging finance and refinancing existing loans are exempt from LVR.
- Banks may charge a low equity fee (LEF) or a low equity margin (LEM) – an additional fee that remains in place until the loan to value ratio reduces sufficiently.
- Increasing your deposit – either through Government assistance, a family guarantor or by saving more – reduces your LVR.
Advice for home buyers for LVRs
While LVR restrictions limit the amount of lending banks can do to borrowers with low deposits, it’s helpful to know there are still lending options available for home buyers who may be struggling to save a big enough deposit. For mortgage advice and a clearer understanding of the impact of LVRs, contact a Mortgage Express branded adviser today.
