LVR = Loan to Value Ratio, you’re probably hearing it a lot lately but what does it really mean?
It may seem as simple as it’s intended, the amount of borrowing vs the value of whatever you’re borrowing against. However, in New Zealand property at the moment the same acronym has different meanings to different stakeholders when being discussed.
The Reserve Bank of New Zealand (RBNZ) and the banks
RBNZ are responsible for managing monetary policy to maintain price stability, promotes the maintenance of a sound and efficient financial system, and supplies New Zealand banknotes and coins. They have many tools that they can use to help keep the economy ticking optimally through keeping inflation between 1-3%. One of the tools in their toolkit is LVR restrictions and their ‘speed limits’.
RBNZ can impose restrictions on what deposits are required for property purchases, those restrictions mean all banks must follow the LVRs enforced by RBNZ.
The changes coming into effect on 1 March 2021 will be as it was prior to COVID-19, 20% deposit (80% lending) for owner occupied and 30% deposit (70% lending) for investors. Then from 1 May 2021, investors will need 40% deposit (60% lending).
However, there is some wiggle room for banks to lend to customers that don’t meet the above criteria, eg. a first home buyer with 10% deposit. These are called ‘Speed Limits’. The restrictions announced will mean that anyone with less than 20% deposit for an owner-occupied home cannot exceed 20% of the funds available for the bank to lend to their customers. For investors, the limit is 5%.
Why are these restrictions being brought back in?
RBNZ lifted restrictions that were in place prior to COVID-19 in response to huge uncertainty in the economy, in an effort to encourage consumer spending through lending and confidence in the market. With no restrictions and no speed limits in place, banks were free to control their own LVRs and speed limits.
Now that time has passed and the recovery from the economic shock looks optimistic, the house prices have risen beyond expectations.
RBNZ have faced pressure to do something to relieve the upward pressure of these house price rises by re-introducing LVR restrictions.
During the time of no restrictions, banks were free to set their own rules, but with the property market so hot, they were also anticipating that RBNZ will likely re-introduce LVRs and speed limits. Considering, if/when they do, are their customers likely to fit into the speed limits that will be enforced? It’s likely that the banks were predicting that their lending may not meet the speed limit criteria, so they were changing their own LVRs for their customers to help control this (like we saw with ANZ, BNZ, ASB and Westpac changing their Investor LVRs to 60% (40% deposit) recently.
With no restrictions from RBNZ, the banks were able to lend more to people like first home buyers. As there was no speed limit which would affect how many first home buyers could access lending, which allowed more first home buyers to actually be able to get in the market. However, now with restrictions in place, the speed limits will force banks to limit their lending for ALL customers, not just investors.
Don’t give up
With these changes coming, it doesn’t mean you should throw your hands in the air and give up on the idea of home ownership or growing your portfolio, these things come and go depending on market conditions and is just part of the cycle. Don’t let it stop you from pursuing your goals. The best way forward is to ensure you use a trusted and experienced mortgage adviser and use the right strategy.
Get in touch with us today, my experienced team and I are can help you achieve your goals.