NEW LVR Restrictions NZ – Market Update
The Reserve Bank (RBNZ) has scrapped the Loan to Value Ratio (LVR) Restrictions effective from May 1st 2020.
If you’re wondering what the LVR restrictions are – there are two main restrictions which the RBNZ brought in, in October 2013. In their most recent form:
- Banks were not able to lend more than 20% of their overall lending to borrowers with less than a 20% deposit. (i.e. for every loan that was above 80% LVR, banks had to lend 4 loans equal to or below 80% LVR).
- Banks were restricted to lending 70% LVR on existing investment properties (new-build properties were exempt). They were able to do up to 5% of their investment lending above 70% for existing properties, but in reality this was limited to refinances where clients already had lending above 70% on an existing property and moved from one bank to another – it wasn’t like we were seeing above 70% LVR new investment loans handed out.
Well those restrictions are now GONE – for 12 months anyway (then will be reviewed again). What could that mean for you as a borrower – looking to either get onto the property ladder, or looking to purchase another investment property?
First – understand that just because the RBNZ lifts restrictions – it doesn’t mean banks are going to be out in the market lending like crazy because they can. Banks are still conservative lenders and as such will assess risk before creating lending guidelines/policies. In addition, all lenders may adopt things slightly differently – like for example how some lenders currently view certain properties differently (apartments for example) or even the income types they’re willing to consider (different banks look at commissions, or bonusses differently for example).
On the assumption that banks do adopt the ‘pre-Oct 2013’ approach – what does that look like?
I’m playing a bit of a guessing game here based on pre-LVR Restriction policies – although keep in mind the world has changed drastically;
FIRST HOME BUYERS:
Banks have the capacity to lend more of their overall lending in the above 80% space now. Which might mean you don’t necessarily need to be the “1 in 5” applicant, but rather, provided you’re assessed as a good credit risk – you may find the application process slightly easier because there is more money to go around.
Key points to be aware of is that banks are always (and always will be – irrespective of LVR restrictions) conservative in this space. The higher the deposit or ‘hurt money’ in the deal, the lower the banks risk and the higher your risk – so you’re likely to walk away from the property if things go south for you. In addition to this I would recommend all borrowers do your best to keep your accounts extra clean – no unarranged overdrafts, no missed payments & dishonour fees, etc. This is important in any market but we often find people have forgotten it in recent times. This is crucial if you want above 80% funding.
In the above 80% space – there are still tranches of lending between 80-85%, 85-90% and 90-95%. Read my other blog for information on this – here:
LINKEDIN article fr Ryan Smuts – Stuck Less Than 20% Deposit
I would be reasonably confident in saying that just because the LVR restrictions are removed this pricing model wouldn’t change – in reality higher LVR loans have always been more expensive in some shape or form. Finance is always priced on risk and mortgage lending is no different.
On the basis that lenders go back to 80% LVR (where they were pre-Oct 2013) for investment properties – what may that look like for you and what could/should you be doing?
I’ll give an example of a hypothetical client situation below and some options which may now be possible – one key thing to understand is that these LVR changes have absolutely NOTHING to do with how banks assess affordability – which has been often what has held a lot more people from borrowing money in recent times. In order to get a mortgage approved you need meet both equity/deposit requirements AND also affordability requirements.
To learn more about the bank’s harsh serviceability criteria – see my other blog here:
LINKEDIN article fr Ryan Smuts – Understanding Bank Servicing Criteria
So on to an example – I’ve used round numbers here so that it is easier. Let’s say I own a home worth $1,000,000 and a rental property worth $1,000,000. I have an 80% loan ($800,000) against my home, and a 70% loan against my rental property ($700,000). In total I have $1.5m of debt, and have 75% LVR across both properties (however this would be calculated as 80% on the home and 70% on the rental – from a banks perspective. If you have both of your properties at the same bank – this is something to be aware of as they will have the properties cross-secured even though you may allocate Loan A to Property A and Loan B to property B.
In the above example, if you have no cash to put into the next deal – but are able to meet affordability criteria – there’s still not much you’d be able to do in terms of further borrowing in the main-bank space (there are non-bank lenders, but this blog will not focus on this). I am effectively ‘tapped out’ of borrowing ability and cannot do anything further at all if viewed from a bank’s perspective while the LVR restrictions were in.
With the new change if banks allow 80% on investment properties you could release equity from your investment – otherwise known as a ‘top-up’ on your mortgage. On the same numbers above this would mean you could release $100,000 which you previously didn’t have access to. You could do several things with this top-up:
- Use it as a 20% deposit to buy a $500,000 investment property. That’s correct – with one small change in lending rules, you’ve gone from not being able to do anything at all – to buying a half a million dollar investment property. Of course if you have more properties or more equity – your money travels a whole lot further than the above example.
- Separate your properties (if at the same bank) and have more debt (80%) secured against the rental property and less against your home. In the above example this would mean 70% against the home ($700,000) and 80% against the rental ($800,000). It would also mean that the properties aren’t cross secured. You could still achieve the same result if you had properties at different banks (the most recommended set-up) by topping up on the rental property and reducing debt on your home.
- Release funds for renovations or work on your properties which may add value. Do that long awaited extension, or cosmetic renovation (spruce up) that you’ve been waiting so long to do.
- Release funds for debt consolidation (see my Debt Consolidation Blog for how to best structure debt in these scenarios) if you have consumer debt or high-interest bearing loans.
Of course – you could do a mixture of the above scenarios tailored to your needs – but this should highlight some of the possibilities for you. The key things to understand as I’ve mentioned above are
- We need to understand that not all banks have made any comment on what they will be doing yet – and this is a ‘wait and see’ game
- This doesn’t change any of the affordability criteria that lenders have. If there were changes in this space it would be a separate bank-by-bank announcement as this isn’t regulated in New Zealand. Therefore if you have been having issues with serviceability/affordability criteria, the LVR change will not help you.
If you have any further queries about what may be possible under this change, or want to review your own position – feel free to get in touch OR comment below.
RYAN SMUTS I Mortgage Adviser
T: 09 486 4719 P: 021 193 9333 A: 388 Lake Road, Takapuna, Auckland 0622