What are the LVR restrictions and how do the new amendments to the rules affect me?

Monday, 11 December 2017 14:38 Written by Jennie Burney, Dennis King Law

By Jennie Burney, Senior Lawyer at Dennis King Law.

First home buyers disadvantaged; New rules mean higher deposit required; It’s a sellers market! New LVR rules slammed; LVR rules in Reserve Bank sights! Do banks fuel property bubbles by lending too much to home buyers?

There have been numerous headlines lately regarding changes to New Zealand banks lending rules required by the Reserve Bank of New Zealand. This article will try to explain them and explain how the recent headlines have been incorrect, and that purchasers are still able to finance a new or first home.

A Loan-to-Value (LVR) ratio is a comparison of how much a bank lends to a purchaser of residential property compared to the value of that property. The Reserve Bank supervises the banking sector in New Zealand and places a risk weight on different types of lending. If banks over-lend in one area this can lead to a build-up of lending risk which could leave the bank overexposed if lending was concentrated in one area or sector where an asset bubble developed which could eventually burst. The Reserve Bank believes that the amendments to the LVR Rules will help support the stability of the housing market.

The new rules which came into force on 1 October 2013 are described as a “speed limit” and restrict how much LVR lending banks can do. The LVR rules have been amended to require banks to restrict their new residential mortgage lending at LVR’s of over 80% to no more than 10% of the dollar value of their total new residential mortgage lending. The LVR rules are not affected by the ability of the borrower to repay and are not influenced by any assets the borrower may have (although these are factors any bank will take into consideration when determining how much to lend). If a bank breaches the new LVR rules they will face serious consequences, and the Reserve Bank may impose a range of sanctions. Banks will need to comply with the “speed limit” over a 6 month timeframe, this means that some months they may lend over 10% LVR loans. After the 6 month timeframe the Reserve Bank has said it will monitor the large banks (those with over $100 million in housing loans) in 3 month rolling timeframes.

The new rules do not mean that you cannot borrow up to 90% of your house value, it will depend on your bank and how much other new lending they currently have. Purchasers of first homes pursuant to the Housing New Zealand Welcome Home Loan Scheme are not affected by the LVR rules.

The LVR rules apply to new loans against residential property and will apply even if the purchaser is a Trust or a Company. However the new LVR rules do not apply to the following types of loans:

Bridging loans;Refinancing of existing loans;High LVR loans to existing borrowers who are moving home but not increasing their existing loan amount.

Existing borrowers will only be affected if they want to increase their borrowing to over 80% of their house value.

In conclusion, recent headlines and media coverage have been misleading. The new LVR rules will not necessarily make it harder for first home buyers and banks are still able to lend 90% or 95% of a house’s registered valuation; it will depend on each bank’s criteria. A bank may charge extra fees or a higher interest rate for riskier lending. Another consideration is the ability of a purchaser to use their Kiwisaver contributions as a deposit on their first home (or as part of the deposit towards their first home) – but that is a topic for another article.

Disclaimer: This article discusses its topic in general terms only and should not be relied upon as legal advice.