Betty and Arnold want to buy a new property to live in. They have a deposit of $80,000. The property has been valued at $800,000. Betty and Arnold’s Bank has declined to loan them the balance to buy the new property because of LVR restrictions. What does this mean?
LVR means “Loan-to-Value Ratio”. LVR restrictions are temporary restrictions on lending imposed by the Reserve Bank. Housing lending makes up approximately half of bank lending in New Zealand, and a home is usually the single largest asset that a family owns. Because the majority of banks are heavily reliant on credit, the Reserve Bank takes the view that any instability in the housing market could undermine the stability of the wider banking system and economy.
The Reserve Bank introduced a new lending criteria around LVRs which restricts borrowers like Betty and Arnold from borrowing more than 80% of the value of the property if they intend to live in the property or use it as a holiday home. This means that to purchase a property valued at $800,000, Betty and Arnold would need to have a deposit of at least $160,000 (20%).
If Betty and Arnold wanted to purchase the property as investors, they would need to have a deposit of $320,000 or 40%.
But, there are some exceptions to the LVR restrictions:
If this was Betty and Arnold’s first home and they wanted to use a Housing New Zealand Welcome Home Loan Scheme they would be exempt from the LVR restrictions.
If Betty and Arnold wanted to build a new residence they would not need a 20% deposit. Loans to people building a new residence are exempt. But, the borrower must either commit to the purchase at an early stage of construction, or be buying the residence (within six months of completion) from the developer.
If Betty and Arnold wanted to renovate their existing property that had watertightness problems or wanted to renovate a rental property to comply with regulations, they would be exempt from the LVR restrictions.
If Betty and Arnold wanted to refinance their existing mortgage by switching banks, they would also be exempt from LVR restrictions, as long as the loan balance does not increase.
If you are unsure about how LVR restrictions may relate to your situation or whether any of the exceptions may apply, feel free to contact us at Gallie Miles to discuss your situation.