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Changes to LVR Restrictions

There has been an update to the LVR restrictions that the Reserve Bank have applied. The main focus of the LVR restrictions is now rental property investors in the Auckland region.

What is the Updated Changes to LVR Restrictions?

From the 1st of November 2015 if you are borrowing money to buy an investment property in Auckland you will generally need a 30% deposit.

If you are borrowing to buy an Auckland home to live in (i.e. taking out an owner occupier loan) there are still LVR restrictions in place with banks only allowed to make up to 10% of their new mortgage lending to borrowers with LVRs over 80% in Auckland.




At the same time these Auckland investment property LVR restrictions come in there will be an easing of the LVR restrictions to the rest of the country. From the 1st of November 2015 banks will be able to increase their proportion of lending to 80%+ LVR borrowers buying owner occupier or rental investment property outside of Auckland from 10% to 15%.

The Reserve Bank is also introducing an exemption for high LVR lending to finance leaky building remediation and similar cases.

Why This New Change to LVR?

The Reserve Bank received feedback from many groups via written submissions, and also via meetings and workshops with affected banks. They modified their proposals taking into account the feedback. They have also been monitoring the effect of the LVR restrictions both in Auckland and around the rest of NZ and comparing this to what they intended by making the change. Now a fine tuning of the restrictions is happening.

Changes to LVR Restrictions
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What is the Aim of the LVR Restriction Update?

Rapidly rising house prices are an Auckland phenomena – these changes aim to dampen the investor spend in Auckland – decreasing the risk of a housing market bubble and subsequent correction - and encouraging investment outside of Auckland.

With rapidly rising house prices in Auckland and intense completion to buy in Auckland with pressure on new and existing supply there is already a trend emerging of Auckland buyers investing in property outside of Auckland. This policy change could see this trend increase – this would be a welcome improvement in the balance of investment across New Zealand instead of just in Auckland.

If you want to find out more about the background behind the LVR restrictions check out our initial article on LVR restrictions in New Zealand.

The Propertytoolbox Home Buyers Guide

For more information about home buying in New Zealand - head to the Propertytoolbox Home Buyers Guide. The mortgages and money section is a great help if you are looking to borrow for a home loan. Or get in touch with a home loan expert, a mortgage broker, this service is free - sort your home loan.


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What are LVR or Low Deposit Lending Restrictions?

LVR or low deposit lending restrictions are something that the Reserve Bank of NZ (RBNZ) have introduced to try and control the NZ housing market.

What is LVR?

LVR is ‘Loan to Value Ratio’ and is the amount of your loan divided by the amount your property is worth expressed as a percentage. So if your property is worth $600,000 and you have a $510,000 loan secured against it your LVR is 85% (510,000 divided by 600,000 multiplied by 100).

Why 80%?

When a bank lends you 80% of the value of a property the chances that the housing market will fall enough that you owe the bank more then the property is worth (i.e. your house value falls more then 20%) are small. This is good all round - it means that the bank is always likely to have enough assets as security to back up their borrowing and it also means that you as the borrower are unlikely to ever have negative equity i.e. owe more to the bank then the house is worth. If you borrow 95% on a house the chances of this happening with a fluctuating property market are a lot higher.

What do these restrictions mean?

What these restrictions are is a limit on lending above 80% LVR. Banks can lend above 80% but only to a small proportion of lenders – only 10% of their lending is allowed to be for situations where the LVR is higher than 80%. This means it is a lot harder to borrow more than 80% of the worth of a property.

How does this control the housing market?

This control means that less people are able to buy a house (they don’t have a big enough deposit) so there are less buyers out there – this swings the market more towards a buyers’ market. With market forces in action this should act to at the very least slow house price growth – hopefully preventing a boom and bust cycle in the housing market that the RBNZ see as a risk to the NZ economy.




Some thoughts about the LVR Restrictions:

  • If you have a 20% deposit then it is less likely that if the housing market goes down that you will end up with no equity in your house – this is good :-)
  • If you are saving a deposit to buy a home your savings target just got a lot higher – first home buyers are feeling the sting of this restriction – this is not so good :-(
  • If looking to trade up - but you bought your current home with a small deposit - you will have to save and/or rely on healthy capital gains to get a 20% deposit to buy a bigger/more expensive home. This could take longer than you planned :-(
  • The RBNZ is serious about keeping the NZ economy stable – this is good :-)
  • If you already own a home - and aren't looking to move - it doesn’t really affect you – this is neither here nor there :-|

Are the LVR restrictions working?

With these restrictions already having been in place since October 2013 there has been some evidence that the restrictions are working with a reduction in total house sales evident across all of NZ. As for whether these restrictions will stop unwanted fluctuations in house prices – it is yet to be proven.

So how long will the LVR restrictions be in place?

They are likely to be lifted at some point – maybe even before the end of 2015 – or it could be a while yet - it will depend on house price inflation – and whether this is determined to be at an acceptable level by the RBNZ. Even when the restrictions are lifted it is likely to be gradually – with banks given the go ahead to increase the percentage of low deposit borrowing banks can take on in stages.

I Can’t Get a Mortgage – What Can I Do?

 

The days of the 100% mortgage seem to have gone (for now). You generally need a 5-20% deposit to be able to buy. This means that you will only be able to borrow 80-95% of the purchase price of the house you want. Going on the average New Zealand house price this means you should have around $20,000 - $75,000 in your savings account…

If you don’t have that sort of money, you can go about getting it by starting on a savings plan – you may be surprised how quickly you can save a significant amount – try diverting that extra money you worked out could go towards a house (mortgage payment, maintenance, rates and insurance etc) to a savings account – only pay your rent out of this account, and watch it grow. This is actually a really good way to find out how you cope with the costs of owning your own home, and evidence of a good savings history will make any bank happy!

If a 5-20% deposit is years away, or likely to never eventuate, or you just want a house now, there are other options available. For a start some banks do not strictly enforce the 80-95% rule, so shop around. A good mortgage broker could be your best bet in this situation.

You could also get a guarantor. This means you could get someone else to guarantee that you will be able to pay your mortgage and if you don’t, they will pay it for you. Usually parents are good places to start if you are looking for a guarantor. They don’t have to be a guarantor forever! When capital gains or improvements mean that you now own 5-20% of the current value of your house, you can get the guarantor removed (subject to your banks approval).

You could be gifted your deposit. Banks like it best if you have saved your deposit as it proves you have stable finances and will be able to make regular repayments. But, if you have no deposit they often accept a gifted deposit (money given to you with no legal right to claim back) or a co-borrowed deposit with another person, again probably a parent.

Co-buying is also an option - that is buying a house with a partner, relatives or friends. Or, if you are only planning to buy a house worth less than $280,000 (or up to $350,000 in some areas) you can check out the government scheme called Welcome Home Loans that helps people with no or small deposits buy or build their own homes.

Need more information on mortages – you need our Mortgages and Money Section.

How Do I Get a Mortgage?

A good place to start is your current bank’s website. Most banks have information about mortgages and ‘how much can I borrow’ calculators. Be careful when using the calculators, the amount they say that you will be able to borrow is likely to differ once all your personal circumstances are taken into account.

Propertytoolbox has some favourite bank websites; Westpac and National Bank have great information and calculators.

If you are after a competitive deal, and interest rates will be a big factor in your decision, you can start by checking out all the banks’ interest rates. The website www.interest.co.nz is great for this. Many banks also advertise products and specials on this website – so have a good look around.

Ringing your current bank or a mortgage broker is a good way to begin the process - outline your situation and see what they have to say. If you are happy to continue after these initial discussions it is a good idea to go and see them in person. Your current bank may be more then happy to lend you money to buy a house, but make sure you approach at least one other bank, this way you will know if you are getting a competitive mortgage product. Also you may be able to use this information to negotiate a better deal.

You will need to prepare a pack of information about yourself. It will include at a minimum - proof of identification and pay slips (or proof of income) for up to two years depending on your employment status (permanent, contractor, self employed etc).

There is a lot of paperwork involved in mortgage applications, so be prepared! You may be required to provide all sorts of information ranging from 3 months worth of transactional bank statements, to business accounts, and even proof of residency. And there will be very comprehensive forms to fill in, different ones for each bank. It can be a long and tiring process!

If you have unusual circumstances, a mortgage broker is probably the best way to go about getting a mortgage.As with most things – the more you shop around and negotiate, the better the deal you are going to get, and the more likely you are to find a mortgage that will suit you. So be prepared to do some hard work to get a good mortgage.

Want to find out what lenders take into account when working our 'how much can I borrow' head here. Need more information on mortgages - the Propertytoolbox Mortgages and Money section has it all!

Mortgage Interest Rates 2011 – Fix or Float?

Mortgage interest rates and what they are doing is always something to be aware of when you have, or are thinking about having, a home loan. Forecasts for home loan interest rates can change quickly so it pays to keep an eye on interest rates on a regular basis – especially if you are looking at buying a house, have a variable rate mortgage (or floating rate mortgage), or have a fixed term mortgage about to come off its fixed rate.

There is agreement amongst NZ economists that given current economic information interest rates will be going up sometime in the next 12 months. At the moment (March 2011) most major NZ banks economists are forecasting that interest rates will have increased by 1%, 2 years from now. How and when this increase will occur is predicted slightly differently bank to bank. Most banks are not expecting a variable mortgage interest rate rise (as a flow on effect from an increase in the OCR) until somewhere between June and September 2011 and a few banks are even suggesting that the OCR will stay unchanged until early 2012.

Given current predictions most economists are recommending to keep your borrowing on a variable or floating rate for now.

Remember though – fixed interest rates will increase well before the OCR goes up – as soon as banks economists are surer about when they think rates will increase they will start factoring this into fixed rates. So if you are looking at fixing eventually – keep a close eye on the fixed rates and economic commentaries over the next few months. And as a general rule – when you do fix - try to fix for no longer than 2 or 3 years.

Major happenings - like the Christchurch earthquake can change interest rate forecasts overnight. This event has decreased the chance of an interest rate rise in 2011 significantly and we may even now see interest rates go down.

Want to find out more about the OCR – we talk all about it in our Propertytoolbox Blog article – ‘The OCR and your home loan interest rate’.

The guys at interest.co.nz have put together a good summary of what the chief economists of the big retail banks in NZ are predicting regarding mortgage interest rates this year. Check out the article ‘Where mortgage rates and term deposit rates are headed over the next year or two and why’.

Do you want to see for yourself what the banks economic experts are saying? Here are some useful links:

BNZ Weekly Overview

Westpac Economic Reports & Latest Economic Overview

National Bank Economic Forecasts

ASB Economic Media Centre

Kiwibanks Economic News

ANZ Economic Markets & Research – Property Focus

At Propertytoolbox we have some advice and tips on how to make your fix/float decision. If you are after info on just what fixing and floating is - check out our structuring your home loan advice.

The Propertytoolbox Blog will be coming to you monthly in 2011 - on the first Tuesday of the month. So keep us bookmarked or in your RSS feed for relevant NZ house buyer's information!





The OCR & Your Home Loan Interest Rate

The Official Cash Rate (OCR) has been prominent in the news lately. That is because in the last 7 weeks it has gone up twice after staying unchanged for a year - it is now at 3.0%. What does this all mean? Well in a nutshell – if the OCR goes up, your home loan interest rate is likely to go up. But usually it is too late once the announcement is made to run out and get a cheap interest rate...

Banks (those guys lending you money for your home) spend a lot of time predicting what is going to happen to interest rates (the OCR movement is part of this) they don’t wait to see what happens at 9am on Monetary Policy Statement and Official Cash Rate review dates (which are usually Thursdays every 6 – 7 weeks apart ) when the governor of the Reserve Bank of NZ (RBNZ), currently found here, makes an announce that the OCR is either going up, going down, or staying the same.

Banks are usually well ahead of the game and have adjusted their fixed term mortgage interest rates well before any OCR announcement – especially those rates for fixed terms of one year and above. Usually, the only interest rates that change immediately when the OCR changes are floating interest rates.

The OCR is not the only factor banks use in setting your home loan interest rate. This interest rate is affected by many things  - one is the ‘funding cost’ – this is the amount  charged by the guys who are lending your bank money (this is the bit where the OCR has some effect) and another is what ‘margin’ your bank decides to put on top – this margin is usually based on cost and risk analysis. Over the last few years, the risk associated with your bank lending you money has increased - amongst other things - house prices have fluctuated and people's ability to make mortgage repayments has been influenced by an economy in recession. This has meant that a larger 'margin' has been added by banks to cover risk.

So should you take any notice of the OCR? Yes! But you need to be paying attention long before the change actually happens - when the OCR goes up (or down), unless it is a big surprise, the change has usually long since been factored into rates available – you are better off focusing more on what the OCR is predicted to be doing over the coming months and using this information when you are deciding about what to do with your home loan.

On OCR announcement days it is actually the commentary that goes along with the OCR announcements that has a greater affect on home loan interest rates. What is said by Dr Alan Bollard can have a strong affect on interest rate forecasting, this is the info that banks are after and are using in their longer term interest rate adjustments. Here you can find what Dr Alan Bollard said on the 29 July 2010 OCR announcement.

Want the run down on monetary policy including about how the OCR affects bank lending rates? Head this way!

Want some expert advice on where mortgage interest rates are heading and help with sorting out lending – a mortgage broker is a good place to start. You can organise a free chat with a local mortgage broker here. Otherwise, check out our mortgages and money section for all you need to know about borrowing for a home.

And don't forget - we have some solid home buying advice in our house buying guide.

Help Choosing a Mortgage Broker

You will be giving your mortgage broker your personal financial details, and your mortgage broker will be helping and advising you as you buy your home – a very large purchase. Therefore choosing a mortgage broker should be done carefully. Not sure what a mortgage broker does – check out our mortgage brokers guide.

There is currently no requirement in NZ for a mortgage broker to belong to any group or to have any financial qualifications – there is also no requirement for a mortgage broker to tell you about their background, experience, and/or qualifications - it is up to you to find out. But a good mortgage broker will be open about their qualifications and memberships - so ask!

Preferably you want your mortgage broker to have a relevant banking or finance background. This background can be in the form of work experience prior to becoming a mortgage broker or from education. You mortgage broker should at least a few years experience in the job of mortgage broker (and evidence of up to date and ongoing training is a plus).

Some mortgage brokers are members of the Professional Advisors Association (PAA). This body has a code of ethics and rules that members must adhere to and all members must have indemnity insurance. The PAA also encourages their members to keep up to date with training available. If the mortgage broker you choose is a member of the PAA – this is great!

Ask the mortgage broker how many lenders they deal with, just a few is not good enough – in excess of 20 is great! Always check if there is a fee! You should be able to find a mortgage broker who will do the work at no charge to you.

Ask the mortgage broker what they can do for you. They should be offering to:

  • Assist you in finding the lender that most suits your needs
  • Save you time by speaking to a number of lenders on your behalf
  • Advise you on suitable loan structures – taking into account your personal situation.

To find out more about mortgage brokers, who they are, why you might choose to use one, what they do, and how they get paid, head this way.

In addition a mortgage broker may offer additional services like:

Which of these additional services you choose to use from your mortgage broker will depend on what you want from your mortgage broker, and how qualified you think they are to provide these services i.e. financial advice really should come from a dedicated financial adviser.

Finally, go with your instincts. There are plenty of mortgage brokers out there, and because they are dealing with your personal information, and personal situation, you need to feel comfortable about that. You need to be confident that your mortgage broker is intent on getting the right mortgage for you. If a mortgage broker doesn’t feel right, find another.

Would you like to chat with a mortgage broker.  Fill in your details here, and a qualified mortgage broker will ring you.

Renting Versus Buying

It is the eternal question – renting versus buying. The conclusion that is nearly always reached is that over a long period of time it is better to buy a house if you can rather than rent.  If you are all set to give up renting and are off on the house hunt - check out our house buying guide for house buying tips.

We all dream of owning our own home but if your finances don’t allow it, your dream of a cosy bungalow in a leafy suburb may turn into a cold box on a main highway. Often, the standard of living you want for you and your family cannot be achieved by buying, so renting is the only way to go. This may be the only way of getting the location you want, the number of bedrooms you require, or getting into the right school zone. Not sure what you want in a house? We have some info and questions to help you get this nailed down in our 'what do I want in a house?' section - complete with a handy checklist that you can use to both make a list of 'wants' and also for a record of how a house scored when visited.

Many people consider rent as ‘money down the drain’ but the same could be said of interest on a mortgage… The success of your own home as ‘a good place to put your money’ really does rely on the house increasing in value over time.  In a lacklustre property market, house values can stagnate for years, especially outside of the main centres. So renting could be a good option in these times.

Consumer have a handy renting versus buying calculator that you can use to work out the basic 'cost of paying a mortgage' versus 'cost of paying rent' question. If you are not sure how much you can borrow, talk your bank or a mortgage broker. Propertytoolbox makes it easy to have a free chat with a mortgage broker - head this way!

Renting means your house deposit is in the bank earning interest, and any other money saved can be added – the power of compounding interest will mean that you are going to see significant increases in your bank balance! To work out what you can save over time by putting your money in the bank - instead of into buying a house - check out this Sorted calculator - if you calculate saving all the money that would have gone towards paying for the mortgage and the cost of ongoing house ownership (usually a lot more then just your rent) you will be surprised at how this can add up over time!

Also if you are not sure you are in it for the long haul – for some reason you feel you may only own a home for a short period of time, or may move often – renting could be a sensible choice as there are significant costs to selling. Often selling uses up any monetary gains made by the house increasing in value if it has only been owned for a short period of time. If the property market has been flat - then you can easily lose money!

Maybe buying a house is not for you right now, but that does not mean that it is not in your future. Keep saving towards a deposit and keep an eye on the property market. When your circumstances, money, and the state of the property market suit your house buying goals - go for it!

House Maintenance Budget? Costs of Home Ownership…

Before you buy a home you need to know the full cost - and we are not just talking about mortgage repayments here! Yes, the mortgage is the most obvious and high profile cost of home ownership and usually is by far the largest one. But don't forget about rates, insurances, water, repairs and maintenance!  So just how much is this all going to cost?

The mortgage is usually the first figure calculated - and often dictates what the house buying budget is for many people. The biggest thing to consider here is the potential effect of an interest rate change. Currently interest rates are low, this almost certainly means that in the future your mortgage repayments are going to be higher. A good way to see the effect a change in interest rate has on your mortgage repayment is to have a play with a mortgage calculator - put in a variety of interest rates and see the effects. Here are some statistics for average bank 2 year fixed home loan interest rates that give you some numbers to play with:

Current 2 year fixed home loan rate = 7.1%

Average home loan interest rate for last 5 years = 8.0%

Home loan interest rate mid 1998 = 10%

Home loan interest rate April 2008 = 9.6% 

Home loan interest rate May 2003 = 6.7% 

With costs such as rates, insurance, and water you will be able to find out the exact amount these will be for the first year at least. These will go up year on year, sometimes by an amount far exceeding inflation, so factor this in. If you budget for an increase of 10% every year for these bills you are unlikely to be caught short.

As a bare minimum you should allow $1,500 or better yet 0.3 - 0.5% of the value of your house per year for maintenance. This does vary widely depending on the age, size and condition of your house and the building materials used. You may not use all of this maintenance money one year, and then have major expenses the next! But it will average out over time. Maintenance cannot be avoided, so budget for it!

Something you may not have thought about is all those extra bits and pieces that you are going to need to buy for your new home - new furniture, new appliances, what about plants for the garden? And are you planning any renovations?

How much you want to spend on renovation and new things for your house and grounds is up to you, but there is no doubting you will want to spend money, so establish a budget.

So when you work out how much you can afford to pay for a house, remember to add on all those extra expenses! A good rule is to add another 20-30% to your mortgage repayments to cover rates, insurance, water, small improvements, new stuff, and repairs and maintenance.

Ultimately you will have to come up with the money for all these extra things from somewhere - so take this into account when you are working out how much you can afford in repayments.

This information is part of the Propertytoolbox mortgage & money guide - This guide contains heaps of good info about the money part of home buying. Read more here.

Should I Use a Mortgage Broker?

Mortgage brokers are everywhere and are becoming a common factor in the house buying and selling process. Should you use one? Firstly - you do not need to use a mortgage broker! The process of applying for and getting a home loan can be done by you and is a fairly straightforward process.

So what can a mortgage broker do for me? A good mortgage broker will use their experience to review your financial situation and get the best home loan deal for you. They will start by collecting details of your financial situation and copies of documents needed for applications.

Once they have all this information the mortgage broker will be able to determine who is likely to give you a home loan. They will usually narrow this down, performing a home loan comparison that takes into account all the information they know about you and then present you with a couple of good home loan options. You can then do your own home loan comparison using the mortgage brokers suggestions and make a decision.

The mortgage broker will also look at home loan interest rates. The current interest rates on offer at banks will be a big factor, but not the only factor, in the mortgage broker’s analysis of the best home loan offer for you. Often a mortgage broker can negotiate a better home loan interest rate then that advertised by a bank. The mortgage broker will work with you to determine a home loan structure i.e. how much to fix (at what home loan interest rate), and how much to float.

This is great! Especially if this is your first home loan or you are unfamiliar with borrowing, interest rates, mortgages or home loans. The process of getting a home loan can seem complicated, and a bit scary! And a good mortgage broker can definitely help you smooth out the bumps and explain the confusing bits.

A mortgage broker can potentially save you tens of thousands of dollars during the life of your loan by negotiating on home loan interest rates, structuring your loans, negotiating bank charges, and recommending products to best fit the way you manage your money.

Not every bank will necessarily say yes to your finance application, but it is the job of the mortgage broker to know which ones will and what information is required for the loan application. So if you are not a ‘perfect’ borrower, a mortgage broker will know who the best lenders are to approach to get the mortgage you are after.

Particularly if you are having trouble getting finance, if you are not feeling confident about negotiating with your bank, if you feel that you could do better but don’t know the right questions to ask, if this is your first home loan, or you just don’t have the time to shop around, a mortgage broker can be a good choice.

However, most mortgage brokers only get paid if you take out a mortgage through them, this makes them ‘invested’ in your house purchase. You need to remember this and be aware that you can only 100% trust the advice of people that have nothing to gain from your house purchase going through.

Recommendations of property valuers and building inspectors should not come from your mortgage broker. Also, make sure you are comfortable with the amount of lending on offer. Some mortgage brokers are almost too good at their jobs and can get you approvals for amounts of money that make your head spin!

Make sure you know your limits and stay in your finance comfort zone! You do not have to take up an offer of a home loan that your mortgage broker has arranged for you! If a finance offer is unacceptable, you can get your mortgage broker to try again.

Most importantly! If you are not comfortable with your mortgage broker do not hesitate in changing mortgage broker or working with the lending institutes directly.

Finally, not all banks will deal with mortgage brokers, so if you want a BNZ home loan or a Kiwibank home loan, for example, you will only be able to approach these banks directly.

This information is part of the Propertytoolbox mortgage broker guide - This guide contains heaps of good info about mortgage brokers. Read more here.