Starting 1 March 2021, the Reserve Bank of NZ (RBNZ) reintroduced loan-to-value ratios on bank mortgage lending, after hitting ‘pause’ last year due to Covid-19.

In a nutshell, LVRs restrict the quota of mortgages that banks can lend to low-deposit borrowers. As RBNZ recently stressed, the measure is designed to support financial stability, rather than cool the property market. But some economists think it may reduce investor activity, which can lead to a slow-down in house price growth.

Before we get there, let’s look at what first-home buyers and investors need to know about LVRs, according to our SHARE advisers.

First of all, what are LVRs?

Introduced for the first time in 2013, RBNZ-enforced LVRs limit the amount of low-deposit lending that banks can do to owner-occupiers and investors. The accent here is on banks: LVRs don’t apply to non-bank lenders.

Under current LVR rules (effective from 1 March 2021):

• Only 20 per cent of a bank’s new mortgages can go to owner-occupiers (e.g., first-home buyers) with less than 20 per cent deposit;
• Only 5 per cent of a bank’s new mortgages can go to investors with less than 30 per cent deposit. Importantly, the low-deposit threshold for investors will increase to 40 per cent in May 2021.

So, what do LVRs mean for you?

It’s important to note that, regardless of RBNZ-enforced LVRs, banks can always introduce their own more stringent rules, to avoid getting too close to the threshold. And they do.

This is essentially what happened over the past few months, when despite the absence of LVR restrictions, banks were still placing deposit requirements on their borrowers – usually, 20 per cent for owner-occupiers and 30 per cent for investors.

Also, LVRs aren’t the only factor that banks consider whenever assessing a new mortgage application. Any lenders – including banks and non-bank – evaluate borrowers based on their ability to repay the mortgage over time. Things like your income, current debts and savings, and how well you’d cope with potential interest rate increases, are all factored in the decision.

In other words, borrowers need to prove that they are on a solid financial footing, and capable of meeting the terms of the loan.

Can you get a mortgage with a low deposit?

Generally speaking, the larger your deposit, the lower the mortgage amount you will need. Borrowers who meet the deposit threshold set by the lender, and prove they can service the loan, are more likely to have their mortgage approved. And if so, they will have more equity in their property right from the start.

But even if your deposit is lower than the threshold (at least 20 per cent for owner-occupiers or 30 percent for investors, soon-to-become 40 per cent in May), you may still be able to get a mortgage. To do so, you will need to prove that your financial situation allows it, keeping in mind that there may be higher costs and interest rates involved.

The key thing is not to put homeownership in the ‘too hard’ basket. Get in touch with a SHARE adviser – we can help you identify where you’re at and create a plan for where you want to be.

Will property prices slow down?

We understand that this question may be on your mind, especially if you’re looking to buy in this hot property market.

At the time of this writing (March 2021), most economists are still expecting LVRs to slow investor demand, particularly when their deposit threshold gets to 40 per cent in May. This may slow property price inflation, but it’s not yet clear to what extent.

Also, some experts are starting to think that the impact of LVRs on investor activity may not be as big as previously estimated. “The recent sharp surge in house prices has helped to push up investors’ equity on existing portfolios, equity that can be used as a deposit for additional borrowing,” said Kiwibank economists.

As the past few months showed, making predictions in this unprecedented environment is difficult, even for seasoned economists. Again, RBNZ-enforced LVRs are just one of the factors underpinning house price trends, so only time will tell more certainty.

Like to discuss your mortgage needs?

Get in touch today. Whether you’re thinking about your first home, next home or investment property, our SHARE advisers can help you explore your option and understand the finest details. Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.