Updated 16th February 2021
It might feel like decades ago, but on 30th April 2020, the Reserve Bank announced the removal of LVR restrictions on banks in New Zealand. In early November 2020, they have announced that the housing market has survived Covid very well, too well if anything, and in March 2021 they are going to reinstate the LVR restrictions.
From 2013 – early 2020, banks have only had a limited amount of funds to loan to “high-LVR” borrowers who are buying their own home. There has also been a little amount of money for buyers of high-LVR investment properties but it was so little it wasn’t worth mentioning.
What has been announced?
In February 2021, the Reserve Bank announced that from 1st March 2021, the LVR restrictions for investment properties would move to a maximum of 70%. Then, from 1st May, LVR restrictions for investment properties would move to a maximum of 60%. There are very small amounts of money the bank can lend over this in rare events.
Additionally, first home buyers have LVR restrictions put in place however they were never really lifted at the banks so this will not affect the banks significantly.
For a bit of history, from 1st May 2020, the banks had no restrictions on the amount of money that they could lend to high-LVR borrowers. While this was a strategic move to boost the economy, it was also meant as a protection for the banks. They could offer Financial Hardship assistance to people who had lost their job from Covid, without risking breaching the Reserve Bank’s rules on how much they could lend out to low-deposit borrowers. Now the Reserve Bank has given notification that these restrictions will be reintroduced in early 2021.
What do the LVR restrictions mean for first-home buyers?
If you are looking to buy your first home, nothing much has changed for you, unfortunately. The removal of the LVR restrictions was never passed on to low-deposit first home buyers. From May 2020 to November 2020 was an immensely uncertain time for unemployment and the banks were unhappy, therefore, about offering higher than 80% lending to new home buyers. They did lend for extremely strong candidates, but that was always their criteria. Now that LVR restrictions are coming back, the banks will have limited funds to lend however the same types of applications that got a mortgage in mid-2020 will continue to be the type of clients the banks want.
What do the LVR restrictions mean for investment property buyers?
Here is where the biggest changes have occurred. All of the major banks immediately changed acceptable LVRs for investment mortgages from to 60% immediately.
This is significant. At 60% maximum LVR, an investor with $200,000 can buy $500k worth of investment property whereas Owner Occupied buyers can buy $1m (at 80% LVR). The Reserve Bank was trying to use one of their economic “levers” to cool the housing market but, by announcing changes in 5 months time, the risk was that investors rushed to the market between November 2020 and March 2021 and heated the market up even more.
From mid-November 2020 it is almost impossible to get an 80% LVR mortgage on an investment property from the main banks with the exception being new-build properties which will be exempt under the Reserve Bank rules. In other words, for a new-build property, you should be able to borrow up to 80% even if it an investment.
What do the LVR restrictions mean for current home-owners?
The reintroduction of LVR restrictions in March 2021 is a clear signal that the Covid Hardship Assistance from the banks is likely to be coming to an end, or at the very least, significantly harder to apply for. Some home-owners who remain unemployed will be caught out by this and may have to make a decision around either selling their home or changing industries. Banks will have a limited amount of money that they can continue to offer for financial hardship.
Here's a quick explanation video around LVRs.
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What about newly built (new construction) developments?
Prior to May 2020, the LVR funding restrictions didn't apply to newly built homes. This is because the Reserve Bank wanted to encourage these houses to be developed and wanted Kiwis to be living in high-quality homes. Buying a new home was, from a finance point of view, almost easier prior to Covid.
With the projected turbulence in the market in mid-2020, the banks changed their tune. A house can take 12 months to build and the banks simply weren't sure they knew what the market was going to look like in 12 months. Some economists predicted the market could be down by 20% putting construction as a risky option for banks. Imagine signing a contract for $800k, only to build and realise the house is now worth $650k!
Luckily the market dip didn't come to pass and it's so the Reserve Bank will make new-build homes exempt from future LVR restrictions in 2021. Housing stock is still an issue in NZ. The Reserve Bank and the government will both want to encourage new houses to continue to be introduced to the market.
What is the criteria for a home to be a new-build?
A purchased house is a new-build if:
- the CCC (Consent Certificate) was issued less than 6 months ago
- you are buying from a developer
This brings up some interesting things that buyers need to be careful of. If someone has bought the house from a developer and then has had to sell it, the property is not exempt from the LVR restrictions (and you will need 40% deposit if it is an investment property).
Additionally, you just need to check that the developer hasn't had trouble selling the property or wanted to keep one for themselves and have now decided to sell them. We have seen this occur and cause a major headache for buyers if the CCC is more than 6 months old.
Property investors are the most affected by the November 2020 and January 2021 announcement from the Reserve Bank. Bank policies have already been changed to limit borrowing to 60% on investment properties in an effort to cool the market. The restrictions that were in place prior to May 2020 are now in place again.