A loan-to-value ratio (LVR) is a measure of how much a bank lends against residential 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. They may be more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates. When we talk about high-LVR (low-deposit) lending, we are generally referring to someone with less than a 20 percent deposit – or an LVR ratio of greater than 80 percent. For investors purchasing property in Auckland secured with a mortgage, deposits of less than 30 percent (LVR of greater than 70 percent) are considered high-LVR.
So getting on to how we calculate LVR. Loan to Value Ratio (LVR) is the amount of your loan as a percentage of the value of the property you are buying. For example, if you want to buy a property worth $1,000,000 and you have a deposit of $200,000, then you are borrowing $800,000 against a $1,000,000 property. Your LVR would be 80%.
What are the current LVR restrictions? The restrictions serve as a type of ‘speed limit’ on the banks, and constrain how much low deposit which is (high level ration lending that the banks can make overall. The restrictions are not absolute – they still allow the banks to continue some high-LVR lending to some borrowers. The Reserve Bank introduced LVRs in October 2013. Banks were permitted to make no more than 10 percent of their total residential mortgage lending to borrowers with less than a 20 percent deposit. From 1 November 2015, the ‘speed limits’ or high-LVR restrictions on banks are 5, 10 and 15 percent for different classes of housing loans, depending on the region in which the mortgaged property is located and the property’s occupancy status. The Reserve Bank eased its LVR lending restrictions for all of New Zealand except Auckland. They are now tighter for those purchasing investment properties in Auckland, reflecting growing housing market risks in the region.
The new rules in Auckland state that you now need 40 per cent equity to buy an investment property and if it’s a new build (as an investment) then you only need 20 per cent. So, what are the implications? Basically, heaps.
The only good news is that it is kind of too late to do anything about it. Banks are honouring existing pre-approvals at 80 per cent for investment properties but under duress and are looking for any opportunity to get out of having to do so. Why? Because The Reserve Bank will be severe in their punishment of any bank that doesn’t comply with the new enforced ratios.
It all emphasises the need for property investors to put even more thought into their purchase or building decisions and to keep a close eye on those debt-to-equity rations. Getting clarification around what proceeds you will actually end up with is imperative. If you have multiple properties, the banks will retain as much of the proceeds as possible to get the new ratios in place.
If you would like to run through some scenarios, give us a call on 04 2124977.