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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).

What LVR will banks currently lend up to?

As at February 2020, banks will happily lend up to 80% against the house you live in.  The banks will sometimes go as high as 90% or even 95% but they have restrictions on the amount of money that can be lent to low deposit borrowers to purchase existing houses.  Often the banks are stretched to their restricted limit and as a result are hesitant to give out pre-approvals for low deposit (high LVR) mortgages.  

For investment properties, most banks will lend up to 70% although there are exceptions to this.

Why do the banks care about LVRs?

The Reserve Bank introduced LVR restrictions on 1st October 2013 as another means to control the runaway prices that were affecting some areas of New Zealand residential houses.  With unfettered access to finance, buyers were continuing to push prices up, particularly in Auckland.  Putting a restriction on how much deposit own-home buyers required as well as even harsher requirements on investment property purchasers was seen as a way to lower the excitement in the residential home market without increasing interest rates.

Since the introduction of LVR restrictions and “speed limits”, the RBNZ has made several updates to the policy.  This reflects the general success of the policy whereby investors particularly are allowed to borrow a higher LVR than the initial 2013 policy allowed.

What is a “good” LVR?

Borrowers with a mortgage (or LVR) higher than 80% are viewed by the Reserve Bank of New Zealand to be stretching their financial resources beyond what is comfortable.  If an urgent sale of a property is required – perhaps because of the loss of a job or matrimonial separation – it is generally accepted that that property could be sold for 80% of it’s approximate value.  This would, of course, be an emergency strategy only.

3 ways to calculate the LVR on your current home

You know what your mortgage is so to calculate your LVR, you just need to know the value of your property.  There are 3 main ways to get the value of your property.

Calculating the value of your home based on Council Valuation

Your local council provides a value of your property approximately every 3 years (also known as Government Valuation or Ratings Valuation).  It is calculated based on recent sales in the area, property type, location, land size, zoning, floor area and consented works. 

Banks are not huge fans of the Council Valuations as they tend to be out of date quickly.

Pros: very quick and easy to find (available on most Council websites)
Cons: not accurate.  Could be up to 3 years out of date.

Calculating the value of your home based on an electronic valuation

There are several databases that provide a much more up-to-date estimate of the value of your property.  Some are free but there accuracy can vary wildly.  The most well known is an e-valuation.  These cost around $50 on some website. They use very recent sales in the area along with all the other considerations in a Council Valuation.

A bank is likely to run an electronic valuation when you ask to borrow against your property or to assess your LVR.

Note that all Mortgage Lab advisers have the ability to produce a free report that is very close to the electronic evaluation.

Pros: more accurate than a Council Valuation. Cheap.
Cons: is electronic so does not account for any renovations you have done to the property

Calculating the value of your home based on a Registered Valuation

A Registered Valuation involves a Valuer coming to your property, inspecting it closely and producing a lengthy report.  They will look at everything including renovations, landscaping, areas that need repair and compare them with other properties they may have valued in the area.

Banks typically ask for a Registered Valuation if you are looking to borrow over 80% of the purchase price (an LVR of over 80%).  A Registered Valuation could cost between $800-$1,200.

Pros: significantly more accurate than other reports, particularly if changes have been made to the property.
Cons: expensive compared to the other reports.

Which valuation method should I use to calculate my LVR?

If you are just looking to understand what LVR you are currently sitting at, the second – electronic – option would probably be best.  An electronic valuation is more accurate than a Council Valuation.  It is more up to date.  But it is also significantly cheaper than a Registered Valuation; free if you call a Mortgage Lab adviser.

Once you have this information simply calculate:

your total mortgage
———————–     x 100
your property value

In the first paragraph we looked at an example which you can calculate.  If your mortgage is $300,000 and your property value is $400,000, that is a 75% LVR.

 

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