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).
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.