Why LVR tweaks mean a lot for first home buyers
The Reserve Bank relaxed housing loan restrictions at the start of the year - you may not have noticed - but this and a softening house market make it a good time to look closely at buying a first home.
The Reserve Bank of New Zealand (RBNZ) the change to loan to value ratios (LVRs) in December but the new relaxed regime only started on 1st January, when most of us were enjoying summer. For first home buyers, this news is a belated seasonal gift from our central bank.
LVR restrictions were introduced in 2013 to contain the rapidly inflating New Zealand housing market, at that point seen as a risk to the country’s financial system. The confidence in the housing market had led to investors and homeowners, with large loans, being highly exposed to financial downturns or spikes in interest rates.
We all remember the booming prices and the never-ending stream of news about this very topic - and probably we didn’t think it would ever come to an end; but it has.
More recently, there’s been a welcome cooling in the housing market and in response, the Reserve Bank has seen it as a good time to ease those restrictions. It is playing a careful balancing act and according to many reports it has made a very deft move.
What are LVR restrictions?
LVR restrictions primarily govern how banks issue loans. The term LVR refers to the measure of how much a bank lends to a person to buy a property, compared to the value of that property.
For instance, an LVR of 80% would entail a deposit of 20% of the property’s value, so if the property’s value was $500,000, the mortgage could be up to $400,000 with a deposit of $100,000.
This would be considered a high LVR meaning the buyer needs to find a large deposit. The higher the value of the home, the bigger the deposit needed. This became a considerable problem in the rapidly rising housing market of recent years, when first home buyers were saving for property that was increasing in value all the time. They would reach a deposit goal only to find the goalposts had shifted up. Many couldn’t keep up, and then gave up.
The recent easing LVRs brings relief.
New LVR rules for owner-occupier loans
Owner occupier loans are for people who will live in the house they are buying - that is they aren’t investors.
The new rules mean banks will be allowed to lend 15% (up from 10%) of their mortgages to people at an LVR of over 80%, which of course means that person will need a deposit of less than 20%. This increases the potential for loans to be approved where deposits are under 20% of the property’s value, a positive change for first home buyers especially when prices are softening.
The rules for investors have also eased but that’s something for a few years down the track when you can buy your first investment property!
A good time to buy your first home
The New Zealand housing market is experiencing a welcome sigh of relief with eased loan restrictions, softer prices and still very competitive interest rates. We also have relatively low inflation in the economy as a whole.
Across New Zealand, house prices rose 6.4% at year-end in January, with a national average house price of $671,500. While still growing, this is much lower than in previous years.
The Christchurch market is performing in a very different way to the much of the rest of New Zealand.
Houses in the City are currently selling at about 2% below the official Capital Values (CVs) used for rating purposes, which were last set in August 2016 and have dropped by an average of 0.6% from 2017 to 2018. This brings the City’s five-year house price inflation to just 21%, a much lower level than in Auckland (71%), Hamilton (59%), Wellington (44%) and Dunedin (37%).
For Cantabrian first home buyers this is good news, a significant number being those who struggled throughout the housing market boom a few years ago. The policy adjustments mean saving for a deposit and then having a loan approved is more likely.
Let’s illustrate this with an example.
Say you were looking to buy a house in Redwood for $400,000 in March last year, with an LVR of 20%. This would require a deposit of $80,000.
Make the same purchase this year and you might be looking at a house costing $376,00 and needing a deposit of $75,200 - which would be a lot easier to save a deposit for.
Of course, exactly how prices have changed will depend on the suburb, the local district and the specific house, with some areas maintaining their prices more than others.
Is There a Catch?
Lower prices and easier loans—isn’t it too much of a good thing?
There are, of course, several ways to consider this question - for Canterbury’s housing market on the whole, the changes are so far working as predicted.
There has been a steady pick-up in activity among first home buyers because the conditions have improved but not to the extent during the recent boom.
As indicated earlier it is a balance between easing the door open to allow people to buy and not letting the market run away again. For now, it is steady but if the situation changes, either up or down, the Reserve Bank can respond.
For anyone wanting to get on the housing ladder, relaxed LVRs are a definite plus. The consequences of lower prices, however, depend on your circumstances. For those wanting to buy a home and settle down in the area, it’s a definite gain. Those who find themselves trying to sell their houses—because they’re moving, or their household’s needs have changed—may find it harder to do so.
That said, it’s a good idea to stay cautious even if market conditions are favorable. It might be easier to get a bigger loan with a lower deposit, but if you don’t need to expose yourself to higher levels of debt, then you shouldn’t. Similarly, don’t let circumstances force you into buying a house before you are ready - take time to know what you want in a house before making that really big decision.
Most of all, enjoy the adventure!
Talk to a mortgage broker.
A mortgage broker can provide you with indispensable advice as to the best way to take advantage of this bright spot in the housing market. With the assistance of a qualified mortgage broker, buying your dream home is easier.
So, what are you waiting for? Get in touch with Taurus Home Loans today. We love nothing more than helping people find their dream first home.
Mobile: 027 352 6262
Phone: 03 366 6087
Posted 13 Mar 2018