New nationwide loan restrictions explained
You may have heard the Reserve Bank of New Zealand (RBNZ) recently announced changes to loan-to-value (LVR) ratios, impacting new home loans for owner-occupiers and residential property investors.
What is LVR?
LVR measures the amount of risk your loan may present to the lender - the lower the LVR, the lower the risk. To calculate the LVR, the amount of the loan is divided by the value of the property, for example if you want to buy a property worth $100,000 and you have $20,000 saved for your deposit. The loan amount you need is $80,000. To calculate the LVR divide $80,000 (the loan) by $100,000 (the property value) and the LVR is 80 percent.
What are the changes?
There are three key changes coming into effect from 1 September, 2016. Majority of banks have been encouraged to implement these changes as soon as possible and many of them have done so.
- No more than 5 percent of all bank lending to residential property investors will be allowed with an LVR greater than 60 percent (that’s a deposit of less than 40 percent).
- No more than 10 percent of all lending to owner-occupiers will be allowed with an LVR greater than 80 percent (that’s a deposit of less than 20 percent).
- Loans already exempt from the existing LVR restrictions, for example loans to construct new dwellings and 'dollar-for-dollar refinances', will continue to be exempt.
Why has the RBNZ introduced this?
Residential mortgages make up 55 per cent of all assets in the banking system, which is seen as an increasing risk to New Zealand’s financial stability. Investment lending is increasing rapidly, contributing to the strength of the market but attracting a higher risk. The RBNZ believes we need to lessen that exposure for long term financial health.
Your options are still open. It’s worth noting these LVR changes are directed at registered banks only. The good news is as a mortgage adviser, I have access to New Zealand’s widest range of non-bank lenders and finance companies who aren’t affected by these changes. While the interest rates may not be as sharp as the 4% range the banks are offering, many are in the 5%’s. There may also be opportunities for 'dollar-for-dollar refinances’, which are exempt from the restrictions - these loans may even be refinanced back into mainstream banks in the future.
Vendors! Talk to us first.
We’ve identified a potential issue if you’re a vendor selling an investment or owner occupied property, and retaining other investment properties. The banks could demand the funds be used to reduce debt on the remaining properties, redirecting cash which could otherwise be put into new property.
In the future, if the house you’re selling isn’t your sole property, it’s a good idea to speak to a mortgage adviser. I’m up to date with the incoming regulations and happy to answer questions for you about current or future loan applications.