What is LVR?
The LVR is the Loan to Value ratio. That is the amount of your loan versus the value of the property. For example if you owe $360,000 on a $400,000 property, then your LVR is 90% (360,000/400,000 x 100%). So, you would have $40,000 (or 10%) equity in the property.
What are the new restrictions?
The Reserve Bank is imposing “speed limits” on the amount of lending that banks can offer to low deposit (high LVR) property buyers.
After October 1st, only 10% of a bank’s new lending can be to customers with less than a 20% deposit. This means that to buy a $400,000 property most purchasers will require an $80,000 deposit. Banks will only look at very high quality customers in the over 80% LVR bracket. These will be people who have extremely high incomes and are otherwise profitable to the bank (perhaps in the form of life insurance policies etc.)
How will this affect first home buyers?
The restrictions will no doubt make it harder for first home buyers to get into the property market, particularly in Auckland and Christchurch where prices continue to rise faster than anyone can save a deposit.
On a positive note though, saving a deposit is good discipline for paying off the home loan that will eventually come with your new home. It is sensible to adjust your budget well in advance of taking on a sizeable debt, such as that required to purchase a house.
Buying a lower priced home with a larger deposit is actually very sensible for first home buyers. Serviceability should be easier and perhaps the loan can be paid off a bit quicker than if a more expensive house was purchased.
The restrictions should help prevent mortgagee sales when interest rates inevitably rise in the next couple of years.
Will these restrictions stop investors from purchasing property?
Probably not! In fact, many investors who have been investing for 5, 10, or more, years have a low LVR over their total portfolio and these restrictions could actually make financing for future properties more competitively priced. Banks will be seriously competing for customers with low LVRs so that they can still lend out enough money to meet their lending targets.
I expect interest rates to be lower for customers with low LVRs and higher for the few (lucky?) customers who can get high LVR borrowings.
Will these restrictions cool the housing market in Auckland and Christchurch?
No. Many buyers (particularly in Auckland) are not even borrowing money within New Zealand. Cashed up foreign purchasers are investing here and these restrictions will not affect them at all.
So, are LVR restrictions a good or bad idea?
From what I can gather, the Reserve Bank is imposing “speed limits” on high LVR lending to protect the banking system and also the borrower. Interest rates will rise!
At present, it is too easy (with low interest rates) for people to buy houses that are really far too expensive for their incomes. I hope that there will be less carnage in the form of mortgagee sales due to these new restrictions.
Painful as it is for first home buyers, the LVR restrictions are the lesser evil when compared to an increase in the Official Cash Rate (OCR). Any increase in the OCR affects every home owner and business owner with borrowings.
I don’t think we’ll notice too much difference in the property market when the LVR restrictions come into place. Personally, I’m watching with “interest” for the coming interest rate rises!