LVR restrictions and what they mean for property investors

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Property investment has always been one of the most favoured ways to secure financial security and prosperity in New Zealand.

A report last year from Core Logic pointed to 39.2% of residential house sales to people with two or more properties.  While focused on Auckland, it definitely highlights the popularity of this investment sector.

However, popularity is a double-edged sword, and results in a more competitive market where pressures have led to the well-publicised rising prices, and possible some overheating.  While varied across the country, immigration, population growth and lack of housing stock supply have all supported this trend.

In reaction to this, the Reserve Bank of New Zealand (RBNZ) took the decision in October last year to implement a number of measures to try to dampen the market, the main one being to roll-out tighter loan-to-value ratio (LVR) restrictions. 

There are already indications these are having an effect and the market is cooling, a little.  Ironically, the result of this may be to encourage further property investment because people see prices easing.  What we are experiencing now is a typical property market with characteristic rising and softening values.

While we don’t know what will happen in the months and years ahead, it’s important for all property investors to understand the meaning of the current LVR restrictions. 

LVR and tighter restrictions

The term loan-to-value ratio (LVR) refers to the difference between the amount of a loan and the value of a property. LVR is one of the key factors that financiers assess when it comes to lending money; the higher the LVR, the higher the risks for the lender.

An LVR higher than 80% means a deposit of less than 20%. Low-deposit borrowing is generally considered high risk and property investors in this LVR range are more susceptible to financial shock during economic downturn.

The tighter restrictions set by the RBNZ ensure that the amount of low-deposit borrowing is minimised. This in turn helps preserve New Zealand’s banking sector and supports the economy as a whole.

Current LVR restrictions

Under the new rules, there are two classifications of LVR restrictions for mortgage lending for banks:

  • For investor loans, deposits must be 40% or higher. For example, to secure a loan for a $600,000 property, a deposit of $240,000 is required. Deposits lower than this are still allowed but they are limited to up to 5% of a bank’s total new lending only.

  • For owner-occupier loans, low-deposit loans or deposits that are below 20% of the loan amount, are limited to only 10% of a bank’s total new lending only.

There are a number of exceptions, though.  Loans related to the construction of new buildings, non-routine remediation, loan refinancing and transferals and those that are made under the Housing New Zealand Mortgage insurance scheme are not covered by the new restrictions. 

Getting around the restrictions

The newer, tighter restrictions set by the RBNZ can be limiting if you are thinking about investing in property. If the limitations are a barrier to you as a property investor, that’s what they were designed to do!  However, this does not mean that you can’t invest anymore, even if you don’t qualify for a mortgage from a bank. 

Use your equity

If you want to get around the restrictions, the first thing you need to do is find out the equity in your home or investment property. For this, you will need a valuation.

The valuation process will then determine if your equity is enough for you to invest in a new property (it should be at least 40% as per the new restrictions). Before going ahead with this, though, make sure you are confident you will have 40%, as valuation can be a very expensive exercise at several hundred dollars for each property; $800 is a typical price.

One thing you need to remember is that the 40% equity figure must include the equity you will also have in the property you are looking to buy. This means the equity in your existing portfolio of homes will need to be higher than 40%.

Take advantage of the exemptions

If you don’t have enough equity after the valuation process, you can also take advantage of the LVR limit exemptions. Among these is investing in a new build with a view to renting it out and holding it as part of your property portfolio.

In this context, the meaning of “new build” is either: a house you buy that is newly constructed and you are the first owner, or a house you’ve had built. 

As the first owner of a new house, as long as it is purchased within six months of completion, as an investor you can obtain up to an 80% loan on a 20% deposit.  Any longer than six months and the required deposit reverts back to being 40% of the house value.  As a builder of a new home, the 80/20 ratio also applies.

Talk to a mortgage broker

The best advice is always talk to a mortgage broker or your bank, if you have any questions about property investment.  Mortgage brokers will understand the hurdles and potential ways to overcome them. But they aren’t wizards, even in Christchurch, and it may be you need to be patient and wait for an opportunity to invest – the current market will change in time. 

Investing in a new property, may be a great way to increase your portfolio.  This also comes with another upside with rental prices being maintained at the same time that house values are steadying.

While the recent tightening of LVR restrictions might seem restrictive, there are still options.  All you need is to think outside the box and get help from the best.


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Posted 14 Jun 2017