Return of LVR restrictions: What it means for first home buyers and investors
The much-anticipated return of loan-to-value (LVR) restrictions kicks in from 1 March.
The Reserve Bank removed the restrictions at the start of the Covid pandemic. At the time, the Bank wanted to promote cash flow and increase economic confidence. However, the economy has bounced back stronger than expected. And record house prices plus intense activity from investors have led to their reintroduction.
So, what does it mean for first home buyers and investors? Here, we provide an overview of the main implications.
New LVR rules
From 1 March, most owner-occupiers need to have a 20% deposit. Banks are required to limit lending to owner-occupiers with less than a 20% deposit to no more than 20% of new lending.
The rules for property investors are different. From 1 May, the majority of property investors require a minimum 40% deposit. As an interim measure, from 1 March to 30 April, the deposit requirement is 30%. This is to cover any already approved loan applications in the pipeline that haven’t yet settled. However, the Reserve Bank has made it clear that the 40% rule should immediately apply to new loan approvals.
The maximum LVR for investment properties will be 70% from March, dropping to 60% from May.
Implications for first home buyers
It's unlikely that the reintroduction of LVR rules will be a major hurdle for first home buyers. Many banks anticipated the change and have already been applying the 20% deposit rule.
However, rising house prices also mean the deposit first home buyers have to come up with is also increasing. Banks have undoubtedly become more conservative in their lending in response to the heated housing market. And these factors are likely to have more impact on first home buyers than the LVR rule change.
Implications for property investors
The 40% deposit requirement will likely slow investor demand. And the banks' conservative approach to lending will also apply to property investors.
If you are looking to buy more properties in the current market, you will need to come up with big deposits. So, if you want to free up some capital, then it may be time to review your portfolio. Selling an inefficient property will release cash that you can invest elsewhere.
Non-bank lenders are another option as they are not affected by the same restrictions as mainstream banks. Although their mortgages tend to be more expensive, the numbers may still add up. So, it's an option worth exploring.
For more detailed advice on the new LVR rules and your situation, get in touch with our expert team.