Loan to Value Ratio (LVR) determines the amount of your loan compared to the value of your property, a number calculated by dividing the amount of the loan by the value of the property.
(For example, if the property is worth $250,000 and you have a deposit of $50,000, the LVR will be 80%.)
Temporary limits on high loan-to-value ratio (LVR) residential mortgage lending have been in place since October 2013, in a response to rapid house price growth, accompanied by a sharp increase in the use of low-deposit loans.
These restrictions have been revised over time with the most recent changes taking effect on 1 January 2018, relaxing LVR for investors to 35% deposit (from 40%), with banks allowed to put up to 15% of new lending (previously a maximum of 10%) into high loan-to-value mortgages (above 80% of the value of the property).
According to the Reserve Bank, restrictions on low-deposit (high-LVR) residential mortgage lending act as a ‘speed limit’ on how much low-deposit lending banks can do. This is extremely important towards stabilising New Zealand’s economy and reducing the risk of a disorderly correction in house prices—it also helps ensure that a large proportion of borrowers in the housing market are not reliant on high-LVR lending.
So, will the LVR be relaxed further?
According to a bold recent article on interest by senior financial journalist David Hargreaves, his answer is no—not this year.
His arguments include the fact that mortgage lending patterns have been far more resilient than might have been expected this year, sector credit figures being up 6%, and the annualised growth rate in outstanding mortgages have either been at holding level this year or edging back up again.
Also, earlier this year the RBNZ made clear it was in no particular hurry to further relax the rules, saying that there would be no chance of this occurring before the central bank's next Financial Stability Report release set for November 28.
So, a very slim chance, but this isn’t necessarily a bad thing. Borrowing more than you can chew is never a good idea—and can be risky if there is a sudden change in circumstances. Our advice if you are struggling to come up with the right deposit and need guidance through the options, is to speak to your mortgage broker who can explore options with you.