Changes to LVR Restrictions
Updated 1 April 2020.
The Reserve Bank of New Zealand (RBNZ) has removed the existing loan-to-value ratio (LVR) rules for new property purchases effective immediately. It will remain in place until 1 May 2021. The RBNZ will monitor the market over the next year, and decide whether the LVR restrictions are needed in the future.
Our take is that the RBNZ is wanting to ensure that the property market does not ‘crash’ when some normality to trading resumes. This could occur possibly through forced sales or a lack of buyers. Additionally with some borrowers needing loan deferrals due to Covid-19, this may have pushed their LVR higher, and caused lenders to have breached the LVR restrictions.
We don’t expect much of a correction now, as owners impacted by COVID-19, should have taken the relief offered by the lenders in a form of moving to interest only or a loan deferral for 6 months. The test will be more salient in 6 months when the owners come out of the loan deferral period and need to recommence paying the loans. Hopefully by then the market may have stabilised.
Removing the LVR restrictions is good news as it may encourage more investors back into the market and will also assist younger owner occupiers who have previously had limited access to finance (when not having a 20% deposit).
It’s important to note that the lenders have 3 main criteria for approving the borrowing of money;
- Loan to Value Ratio (LVR)
- Responsible Lending Guidelines
- Debt Servicing
The critical criteria is that of debt servicing. In these post COVID-19 times, whether the client has a secure job to go back to and what level of income they are getting paid, together with the banks servicing rate (varying from 6.5-7.5%) will be more determinant in whether they meet the criteria and can therefore obtain a mortgage.
What is also yet to be determined is how the lenders will respond to any removal of these restrictions. Since they were put in place there are new ‘capital adequacy’, or requirements that the RBNZ is policing, so they will be cautious unless offered some form of exception or softening to allow them to lend more to low deposit borrowers.
At Lifetime we are monitoring this closely and will keep you posted of progress. Until then we are still very much open for business and helping clients get pre-approved for finance or understand their position so they can plan their next move so please call us, we’re here to help.
Any day now, if not already, you are going to get your Kiwisaver annual statement. This year the statements must have a projection to give you some indication of how much you could have in your account at retirement.