A guide for borrowers
1. What are LVRs?
A loan-to-value ratio (LVR) is a measure of how much a bank lends against residential property, compared to the value of that property. Borrowers with LVRs of more than 80 percent (less than 20 percent deposit) are often stretching their financial resources. They may be more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates. When we talk about high-LVR (low-deposit) lending, we are generally referring to someone with less than a 20 percent deposit – or an LVR ratio of greater than 80 percent. For investors purchasing property in Auckland secured with a mortgage, deposits of less than 30 percent (LVR of greater than 70 percent) are considered high-LVR.
2. What are the current LVR restrictions?
The restrictions are a form of ‘speed limit’ on the banks, and constrain how much low deposit (highLVR) lending that the banks can make overall. The restrictions are not absolute – they still allow the banks to continue some high-LVR lending to some borrowers.
The Reserve Bank introduced LVRs in October 2013. Banks were permitted to make no more than 10 percent of their total residential mortgage lending to borrowers with less than a 20 percent deposit.
From 1 November 2015, the ‘speed limits’ or high-LVR restrictions on banks are 5, 10 and 15 percent for different classes of housing loans, depending on the region in which the mortgaged property is located and the property’s occupancy status. The Reserve Bank eased its LVR lending restrictions for all of New Zealand except Auckland. They are now tighter for those purchasing investment properties in Auckland, reflecting growing housing market risks in the region.
Banks’ mortgage lending is now placed into one of three classifications of LVR restriction.
Auckland investor loans – 30 / 5
This class of loan is for those whose borrowing is secured against property that includes an investment property located in the Auckland Council area. You generally need at least a 30 percent deposit for this type of property. Low-deposit (high-LVR) loans in this category are defined as those loans that are more than 70 percent of the property’s value. Low-deposit loans can make up no more than 5 percent of a bank’s total new lending in this category – lower than initial restrictions (10 percent). If your loan is secured by more than one property, including an Auckland investment property and other types of residential properties, you may be able to borrow an amount equal to 80 percent of the value of the other types of residential properties and 70 percent of the value of the Auckland investment property (see “Are there any exemptions or special cases to the LVR restrictions?” question below).
Other Auckland loans – 20 / 10
This class of loan is for those whose borrowing is secured against property that includes Auckland property, but no Auckland investment property. You generally need at least a 20 percent deposit for this type of property. Low-deposit (high-LVR) loans are defined as those loans that are more than 80 percent of the property’s value – the same as initial restrictions. Low-deposit loans can make up no more than 10 percent of a bank’s total new lending within this category.
Non-Auckland loans – 20 / 15
This class of loan is for borrowing secured against residential properties located outside the
Auckland Council area. You will generally need at least a 20 percent deposit for this type of property. Low-deposit (high-LVR) loans are defined as those loans that are more than 80 percent of the property’s value. Low-deposit loans can make up no more than 15 percent of a bank’s total new lending within this category.
Do LVR restrictions prevent me from borrowing if I only have a 5 or 10 percent deposit?
That depends on your bank and your individual circumstances. The LVR restrictions operate by setting an upper limit on the share of low-deposit lending that each bank can provide. Your bank may be prepared to offer you a low-deposit (high-LVR) loan, depending on what other low-deposit lending commitments it has made. There are also special exemptions to the restrictions on high-LVR lending (see “Are there any exemptions or special cases to the LVR restrictions?” below). Note that bank lending is also subject to the banks’ own internal lending guidelines and policies. You need to talk to your bank.
How is my loan-to-value ratio calculated?
Your LVR is your loan value divided by the valuation of the property or properties you are giving the bank a mortgage over. Consider a property worth $400,000 to be purchased using a cash deposit and a loan secured over a mortgage. A deposit of anything less than $80,000 (or $120,000 for an Auckland investment property) would be a high-LVR loan, as this would result in an LVR above 80
(70) percent ((400,000 – 80,000)/400,000 = 80 percent).
How do you define the Auckland area?
The Auckland Council boundaries are defined here. A good rule of thumb is to ask, ‘Who do I pay rates to?’ If the answer is that you pay them to Auckland Council, then the property is in the Auckland Council area.
What is the Reserve Bank’s definition of ‘owner occupier’?
A loan secured by residential property located in Auckland will be subject to the stricter LVR restriction if one of the properties securing the loan is not owner-occupied. The rules define when a property is considered to be owner-occupied. Some examples of cases where a property is likely to be considered owner-occupied are provided in the definition of owner-occupied property (PDF 70KB).
A property will be an owner-occupied property if the person who owns the property, or their spouse, occupies the property as either their principal or secondary residence. The definition also covers common ownership structures, such as company and trust structures. For a secondary residence, any rental income earned from the property must be minimal (e.g. a bach rented out for six weeks a year) for the property to retain its owner-occupied status. No rental income test applies to a principal residence; hence a property will continue to be considered owner-occupied if the owner, for example, takes in a boarder.
Banks are expected to interpret aspects of this definition, including if rental income on a secondary residence is ‘minimal’. Refer to your bank for their internal policies regarding a dwelling’s occupancy status.
I own and occupy my home, and intend to build a ‘granny flat’ or studio at the rear of my section for extra income. Is this construction loan exempt from the LVR restrictions?
This type of construction is potentially exempt from LVR restrictions. However, applicability can depend on a number of case-specific factors. In order to qualify for the construction loan exemption, the new building must be considered a new residential dwelling. For example, a minor dwelling’s construction form may more closely resemble an extension or renovation of an existing property than a new dwelling and thus fall outside the scope of the exemption.
Note that construction loans continue to be subject to individual banks’ internal lending guidelines, with individual banks establishing their own practices and policies relating to construction lending within the minimum requirements set out by the Reserve Bank. The Reserve Bank will be monitoring banks’ construction lending to ensure that normal prudential standards are maintained at the individual bank level.
Do LVR restrictions apply to first-home buyers?
There is some special treatment for low-deposit first-home buyers under Housing New Zealand’s Welcome Home Loan scheme, as these mortgages are exempt from the Reserve Bank’s LVR restrictions (though borrowers will be subject to any conditions applying under the Welcome Home Loan scheme, and individual bank lending guidelines).
All other low-deposit, first-home buyers may be affected by LVR restrictions. If your deposit is less than 20 percent, it will be up to your bank to decide whether it is prepared to lend to you using the capacity provided to it under the respective 5, 10 or 15 percent LVR ‘speed limits’, or whether your circumstances fit within one of the special high-LVR exemption categories (see “Are there any exemptions or special cases to the LVR restrictions?” below). You will need to check your situation with your bank.
I already have a mortgage – how does this affect me?
LVR restrictions apply to new low-deposit (high-LVR) loans, and not retrospectively to existing loans.
The new restrictions will only affect you if you want to take out a ‘top-up’ loan that takes your total LVR above the required threshold (70 percent or 80 percent, depending on the location of the mortgaged property(ies) and its occupancy status – see “What are the current LVR restrictions?” above). If the total LVR is taken above the appropriate threshold, your bank would have to decide whether to use some of its ‘speed limit’ capacity within that respective category of residential loan to make the ‘top-up’. Note also that there are some possible exemptions in the case of refinancing of existing loans, replacing an existing loan with a new loan if the borrower moves house (portability), and bridging loans during the sale and purchase process (see “Are there any exemptions or special cases to the LVR restrictions?” below).
Check with your bank for details of how modifications you are intending to make to your existing mortgage(s) could be affected by LVR restrictions.
My partner and I own our house and a rental, both are heavily mortgaged. In the event of a market crash, what would happen if the value of both our properties suddenly drops to say less than 20 percent equity? Would we be in breach of the LVR policy and what could our bank make us do?
The LVR restrictions apply only to new bank loans. If you were to change banks and require a new bank loan, then it is possible that the LVR restrictions might apply to you – but not otherwise.
The Reserve Bank cannot say what your bank might, or might not, require you to do regarding your existing loan if there was a sudden market correction. Please refer to your bank regarding their internal residential mortgage policies regarding market correction scenarios.
I am buying a house with my partner so there are two borrowers – how does the LVR work for us?
Joint borrowing doesn’t change the LVR – the total loan value and property value are used to calculate the LVR in the same way as for a single borrower.
I want to top-up our mortgage to take a holiday not to buy a house. Am I affected by the LVR restriction?
The loan purpose doesn’t matter. If a mortgage top-up will take your LVR above the required threshold (70 percent or 80 percent, depending on the location of the mortgaged property and its occupancy status– see “What are the current LVR restrictions?” above), then your bank may be prepared to meet the top-up using its capacity provided by the LVR ‘speed limit’ within that category of residential loan. Again, you will need to talk to your bank.
I want to buy a small business partly using a housing loan – does the LVR restriction apply to me?
The LVR restriction may apply to you depending on how your bank classifies your loan. If the bank classifies your loan as a residential mortgage loan and you have an LVR above the required threshold (70 percent or 80 percent, depending on the location of the mortgaged property and its occupancy status– see “What are the current LVR restrictions?” above), then the restriction will apply in respect of your loan, even if the purpose is to buy a business. In such a case you will need to talk to your bank to see if it is prepared to lend to you from within its ‘speed limit’ capacity for that category of residential loan.
I want to buy a farm – do the LVR restrictions apply to me?
LVR restrictions apply only to residential mortgages and would not generally be expected to apply when purchasing a farm. However, there might be some exceptions (for example, if you were buying a freehold house with a separate title on a farm). You will need to check with your bank.
Are there any exemptions or special cases to the LVR restrictions, e.g. residential construction loans?
Yes, under specific circumstances there are exemptions to LVR restrictions. Where a loan falls under an exemption, the loan is not included in the banks’ high LVR ‘speed limits’. These exemptions include the following:
Construction-related: these exemptions support new housing construction and property remediation. The construction exemption is for lending (including increases of existing loans) to finance the construction of a new house or apartment. The property remediation exemption is for an increase in value of an existing loan to finance some types of non-routine building repair work on existing properties (e.g. fixing leaky homes). For more information read the questions and answers about the construction exemption.
Portability: these exemptions permit certain refinancing of loans or apply if a borrower shifts house. Banks can allow a person moving their principal place of residence to take a new loan secured over the new property up to the value of an existing loan, known as ‘portability’ of an existing loan amount. This ‘portability’ applies even if the borrower is switching banks.
Bridging: a short-term bridging loan may be exempt from LVR restrictions. The exemption applies where a borrower is purchasing a new property, which will be their principal residence, before the sale of their current principal residence.
Refinancing: the refinancing of existing residential mortgage loans for all borrower types can be exempt from high LVR restrictions, subject to certain conditions.
Housing New Zealand loans: loans made under Housing New Zealand’s Mortgage Insurance scheme, including the Welcome Home Loan scheme can be exempt from the RBNZ’s high LVR restrictions.
Combined collateral: some high-LVR (greater than 70 percent) loans secured by Auckland investment property (see “What are the current restrictions?” above) can be allowable in the case where an investors’ property portfolio includes Auckland investment property and either Auckland owner occupied property and/or any type of non-Auckland property. In this instance a purchaser may be able to borrow up to 80 percent against the value of property that is not Auckland investment property, and 70 percent against the value of investment property within Auckland, under a ‘combined collateral’ exemption applied by the purchaser’s bank.
Note that bank lending is also subject to banks’ internal lending guidelines and policies, within the RBNZ’s minimum LVR requirements. For example, banks may set internal policies for permissible LVR limits on new construction lending even if the lending qualifies for a high-LVR exemption under RBNZ restrictions. Similarly exempt Welcome Home Loans will be subject to eligibility criteria under the scheme.
16. What can I do if I think my bank is being unreasonable in the way it is implementing the LVR restrictions?
The Reserve Bank sets out the minimum requirement for banks with the LVR rules. It is up to the banks to establish their own practices and policies for lending within those rules. If a bank wants to apply a stricter policy that the rules require, they are within their rights to do so. Borrowers who are dissatisfied with the stance or service offered by one bank are at liberty to shop around the other banks.
The Reserve Bank website contains information about LVR restrictions: www.rbnz.govt.nz