Understanding Loan-To-Value Restrictions

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Understanding Loan-To-Value Restrictions

If you are looking to buy a house and have been following the news, you would have heard about the big story that broke last month – the announcement of the easing of mortgage lending restrictions by the Reserve Bank of New Zealand. But what does this mean and how will it affect those looking to buy a house? In this blog, we will break down what the restrictions are and why they were put in place, why they were eased and what it means for first-home buyers.

What are LVR’s?

A loan-to-value ratio is a measure of how much a bank lends against mortgaged property, compared to the value of that property. Borrowers with LVRs of more than 80 percent (less than 20 percent deposit) are often stretching their financial resources which often means they are more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates.

Loan-to-value restrictions were first introduced in 2013 in an attempt to cool down an overheated housing market. During this time there was a heightening risk to the housing sector as almost a third of new lending was at a high LVR, the Reserve Bank put restrictions on how many loans can be approved to high LVRs. Those restrictions were eased earlier this year to 15 per cent of new loans to owner-occupiers can have deposits of less than 20 per cent and 5 per cent of loans to property investors can have deposits of less than 35 per cent.

Why are they being eased?

The LVR’s were put in place during the aftermath of a global financial crisis, as a means to keep the local market from collapsing, and keeping the everyday New Zealander safe from becoming a victim to this. But in recent years, and especially this year, risks to New Zealand’s financial system ae easing, with the decline of credit growth and a stabilising of house prices, the Reserve Bank is confident in their decision to ease loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans.

The new restrictions, which will come into effect next month, will have Owner-occupier restriction shift to 20%, and banks will be able to lend 5 per cent of their new loans to investors with a deposit of less than 30%.

What does it mean for first-time buyers?

The easing of LVRs is welcomed news for first-time buyers as it means securing a mortgage is a little bit easier. It means that banks are able to lend to more first-time buyers and if what happened earlier this year is an indication, low mortgage rates can follow, as banks compete to try to draw in these new lenders

The loosening of restrictions also affects the deposit. Real Estate Institute chief executive Bindi Norwell covered the significance of the LVR changes on first home buyers, “If you think of a $560,000 median price for the country, that’s $112,000 [for a 20 per cent deposit]. If they reduce it by five per cent it’s down to about $84,000. So that’s about a $28,000 difference, a huge impact.”

This is big news for first-time buyers, but there is still a lot to unpack and understanding how this works is crucial, seeking the advice or a mortgage broker can be vital in making sure you are getting the most out of these new benefits.



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Daniel Vernon