Mainstream banks have started to respond to the LVR (Loan to Value Ratio) restrictions following the Reserve Bank’s announcement on November 29th 2017.
LVR on Investment properties
Most major banks have indicated that, as of 1st January 2018, they will begin lending up to 65% on investment properties (up from 60% this year).
Let’s say a couple have their own house and want to buy an investment property, both valued at $500,000. Previously they could borrow up to 80% on their own home ($400,000) and 60% on the new investment property ($300,000). In other words, the total borrowing on their $1 million property portfolio would be $700,000.
As of the 1st January 2018, the same couple will be able to borrow $400,000 on their own home as before. But now they will be able to borrow $325,000 (65% LVR) for a total borrowing of $725,000.
Is this enough?
With the new rules, it is slightly easier to borrow to purchase an investment property. It won’t open the flood gates but buyers who are currently just short of being able to buy may find themselves back in the market. I think this is exactly the outcome that the Reserve Bank are hoping for.
Low (high LVR) Deposit Buyers
There has been some confusion around this change of policy. Currently, 10% of any bank’s new owner-occupied mortgages can be lent to clients with less than 20% deposit. In other words, those with higher than 80% LVR.
The LVR mark is still 80% however the banks can now lend up to 15% of their new owner-occupied mortgages to low deposit buyers.
And banks are already indicating how this is going to change. One bank, who has recently declined almost all mortgages over 85%, has indicated that they are now more prepared to look at up to 90% again.
Is this enough?
A mere 5% increase in available lending doesn’t sound like much. But the question has to be asked, what percentage of lending goes to low deposit buyers if there are no restrictions? Of course, it’s not 100%. A large portion of mortgages will always to be low LVR owners simply due to the nature of capital growth.
Given this, I think the change to the available lending is going to more significant than it initially sounds. And the great news is, this is going to affect first home buyers the most (for the better). This will allow those with a deposit hurdle more of a chance to get into the home they want.
Some exciting changes are happening to the property market. The 2 main changes are:
- Investment property buyers no longer require as much deposit to purchase
- Low deposit borrowers have a better chance of being able to get a mortgage if they are borrowing >80%
Think of the Loan to Value Ratio (LVR) like this: What percentage of the house is covered by the mortgage… Or, in other words, what percentage of the house does the bank own?
If your house is worth $400,000 and your mortgage is worth $300,000, then your Loan to Value Ratio or LVR is 75% because the bank has lent you 75% of your house.
If the value of your house increases to, for example, $500,000, your new Loan to Value Ratio is 60% (because $300,000 is 60% of the new value – $500,000).
Currently banks will happily lend up to 80% against the house you live in but will sometimes go as high as 90% or even 95%. Most banks will lend up to 65% against any investment properties although there are exception to this.