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How the 2020 removal of high LVR restrictions affects you

On 30th April 2020, the Reserve Bank announced the removal of LVR restrictions (here is an article on the changes to LVR restrictions) on banks in New Zealand.  From 2013-2020, 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 (here is an article explaining what LVR means) investment properties but it was so little it wasn’t worth mentioning.

What has been announced?

The banks now have no restrictions on the amount of money that they can lend to high-LVR borrowers.  This was a strategic move by the Reserve Bank to stop any potential issues if house prices dropped.  It is also meant to encourage a boost in demand for property as we come out of lockdown and restart the economy.

What does this mean for first-home buyers?

If you are looking to buy your first home, your world just got significantly brighter.  Let’s be clear, you will still need to be a credit-worthy applicant with enough income to meet the bank’s criteria.  But up until now, you may have only been able to get pre-approval at your current bank.  Most banks have been reluctant to give pre-approvals to “non-bank clients” in case that means their existing clients can’t be approved.

But with the removal of LVR funding restrictions, banks should be able to lend money to any client that meets their income and credit requirements.  You will be able to choose the bank that is best for your circumstance, not the bank that has enough money to lend you.

What does this mean for investment property buyers?

High-LVR lending comes with risks to the banks.  Their main concern is being “underwater” if an owner stops paying their mortgage.  If lending was to be allowed up to 95% and then properties drop in value by 10%, the bank is the one that loses money.

As more and more properties are added to a portfolio, this risk gets larger for the banks.  Until the banks get some sense of how the property market will look post-Covid, don’t expect a significant change to the LVR requirements for investment property.  It’s likely that, for quite a while, they won’t lend over 70% on an investment property.  Once they’re comfortable that the market has stabilised and isn’t going to drop significantly, it’s likely that they will increase this to the pre-2013 area of 80% for an investment property (with your own home also being at 80%).

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What does this mean for current home-owners?

In the Reserve Bank's statement, it clearly stated that it didn't want the banks to be unable to extend hardship assistance to existing home-owners because of the LVR restrictions.  It's unlikely you will be able to apply for top-ups in the high LVR area for luxury purchases but if a loss of income or a decline of property value means your mortgage is suddenly over 80%, this won't be as dire for you or the bank as it was previously.

Here's a quick explanation video around LVRs.
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With the removal of high LVR restrictions, are we heading into the Wild West of lending?

One saying is going to be important to remember over the next few months.  Just because the banks can, doesn't mean they will.  That is to say, just because the banks can lend as much as they like on a property, it seems unlikely that they will open the floodgates.  The rest of 2020 is going to be bumpy, economically speaking.  Businesses may have to close, properties may have to be sold quickly to cover lost income.

This year will not be the time to turn up with outside-of-the-box properties.  The banks are going to want high-quality securities (properties) backed by high-quality income earners.  Some examples of outside-of-the-box properties to stay away from are:

  • small apartments (less than 40-50sqm)
  • leaky or monoclad homes
  • leasehold properties
  • unconsented properties
  • uninsulated homes (don't meet housing standards)

These properties will be coming onto the market as people try to get some cash together but banks are going to be even more negative about them than ever before.

What about newly built houses? They weren't affected by high LVR restrictions before this.

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.  So what happens now for newly built homes?

Well, the fact still remains that new houses are higher-quality, warmer and traditionally have more equity in them than existing properties.  It's going to be just as easy to finance existing homes but the huge benefits that come from buying a new home shouldn't be overlooked.

Will Low Equity Fees and Low Equity Margins disappear for high LVR buyers?

Currently a mortgage of 80% (high LVR) or more attracts either a one-off fee at the time of settlement or additional interest on your mortgage.  The likelihood of these disappearing is very low.  As discussed above, banks take a huge risk on high-LVR mortgages and this needs to be compensated for.  Don't expect Interest Only restrictions to be removed for the same reason.  Despite popular myths, banks actually want you to pay down your mortgage so they can lend that money out to another person and spread their risk.

Summary:

The removal of LVR funding restrictions is great news for high-quality first home buyers and gives them more choice of banks.  In time, investment property buyers will benefit too although it would be surprising to see this immediately.  Applicants will still need to have good and, importantly, provably stable income.  The property that they are buying will need to be high-quality.

The LVR restrictions will be reviewed in 12 months (April/May 2021).

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