Owning a home

Understanding loan-to-value ratios

4 min read


From 3 January, 2018, The Reserve Bank of New Zealand has brought into effect changes to its strict loan-to-value ratio (LVR) restrictions. For most of us the LVR rules remain unchanged at 20%, however from the start of the year 15% of each bank’s new mortgage lending to owner occupiers can be at LVRs of more than 80%. Previously it was only 10%. This means more Kiwis with a deposit of less than 20% will be able to secure home loans.

Property investors have also seen a slight loosening of their LVR restrictions, with 5% of each bank’s new mortgage lending to residential property investors to be at LVRs of more than 65%. Previously this was 60%.

What is a loan to value ratio?

Loan-to-value ratios are something anyone looking to take out a home loan needs to be aware of. It’s not just private buyers that are affected, either - LVRs also apply to residential property investors. The LVR is a measure of how much a bank lends against a property, compared to the value of that property.

It’s usually expressed as a percentage - for example, say you want to buy a house costing $500,000 and have a deposit of $100,000, you’ll need to borrow $400,000. This means the loan to value ratio for this example will be 80% - meaning the loan represents some 80% of the value of the home.

Why does it exist?

Since 2013, LVR restrictions have been put in place by the Reserve Bank of New Zealand and were designed to de-risk the banking sector. The idea behind the LVR restrictions is that it creates an economic buffer by preventing too many people from taking out loans with too small a deposit. The fear was that, as people clamoured to enter the property market before prices went up even further, they’d take on large loans with small deposits leaving them financially vulnerable should the value of the house suddenly drop - potentially leaving them owing more than the house is worth. The restrictions apply right across the country and another consequence of them has been to help cool the property market.

How do LVRs affect private buyers?

For private home buyers (owner-occupiers), LVR restrictions only affect people with small deposits of 20% or less. If you have a deposit of more than 20%, the LVR restrictions won’t apply.

For anyone with less than 20%, it’s entirely possible you may not be able to get a home loan. However, the situation can be somewhat confusing, the reason being, in addition to the LVR restrictions, the Reserve Bank also put in place something it calls “speed limits”.

Speed limits

Speed limits refers to the way the Reserve Bank allows a lender to have a certain number of high-LVR loans on its books at any given time. This means it’s theoretically possible for someone with only a 10% deposit to get a loan despite the LVR restrictions. However, once the lender hits its limit of high-LVR loans, it can’t make any more. Because the number of high-LVR loans is always in a state of flux (as loans are paid down and time goes by), this could see an odd situation arise where two borrowers with identical cases apply for a home loan with the same bank on different days - and each have a different outcome.

How do LVRs affect property investors?

Property investors are affected in much the same way as owner-occupiers, it’s only the numbers that are different. For people classed as investors (any home loan attached to a home that isn’t occupied by the owner), a high-LVR loan is now anything less than a 35% deposit. Previously, this was 40%.

Speed limits also apply for investors, with the only difference being that a lender can have no more than 5% of its total residential investor lending in the high-LVR zone.

I already have a home loan, does this affect me?

Even if you already have a home loan, LVR restrictions can affect you. If you’re close to the 20% high-LVR threshold and the value of your property drops, you could suddenly find yourself with a high-LVR loan through no fault of your own. This won’t affect you unless you try and increase your borrowing. For example, it could affect your ability to extend your loan, or refinance to fund things such as renovations. Similarly, if you’re close to the LVR limit, and adding to your home loan might put you over the high-LVR threshold, you may not be able to borrow what you want. The only way to know for sure is to talk to your bank and discuss what you want to do.

I have less than 20% deposit, is my home-owning dream over?

It’s important for potential buyers to understand that changes are being made to help get them into their first home and further loosening to LVR restrictions is expected in the future.

If you have less than 20%, the dream isn’t necessarily over. While a larger deposit is always better (you’ll borrow less and pay less interest), it’s still possible to get your home loan approved with less than 20% deposit. This is because of the speed limit situation we talked about earlier. Even if your application is declined now, you may well find it approved further down the track (even if your circumstances remain the same) thanks to the ever-changing landscape the speed limits create.

Always remember, your bank is there to help guide you through the loan-to-value ratio maze, so get in touch to see what they can do.

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