Given the dark clouds looming over our economy, the news that the Reserve Bank of New Zealand (RBNZ) is planning to scrap its loan-to-value ratio (LVR) restrictions for at least a year is a small ray of sunlight for first home buyers (FHBs). However, if you’re expecting a warm welcome from your bank if you’ve only a small deposit, you might want to think again.
What is an LVR?
An LVR represents how much deposit you have against the size of a loan you require to purchase a property. If you want to buy a house for $1m and have a $200,000 deposit, the LVR is 80%.
High-LVR lending typically refers to people who have less than a 20% deposit, and since 2013 the RBNZ has limited the number of high-LVR mortgages lenders have been able to make.
Currently there are two limits in place: 80% of a bank’s lending to owner-occupiers has to be low-LVR and at least 95% of its mortgage lending to investors. However, due to the effects of COVID-19 on the economy, the RBNZ is now planning to drop the limits altogether.
What is the point of LVRs?
Since the introduction of the original LVR restrictions, the percentage of high-LVR mortgages has dropped from a quarter of all mortgage lending to just 10%, according to RBNZ statistics, this is despite the relaxing of the rules at the start of last year.
But just because banks have been given the green light to increase the number of high-LVR mortgages they have on their books, they are unlikely to do so in great numbers.
Originally, LVRs were introduced to tackle a red-hot property market. The idea behind them was two-fold:
- To prevent mortgagees from being left in negative equity should the market suddenly cool and the value of their house drop more than their original deposit
- To safeguard banks from being left with too many bad loans should the housing market crash, as it did during the GFC
Which brings us around in a neat little circle to the current economic climate, where we’re facing rising unemployment, the prospect of a long, slow recovery and falling house prices.
Why scrap the LVR limits?
In its statement, the RBNZ said that the proposal to scrap the LVR limits was to: “help banks to keep lending to support customers, including with mortgage deferrals”. Note, they didn’t say to help FHBs onto the property ladder!
Already, at the time of writing, according to the New Zealand Bankers Association, 45,210 customers had reduced their loan payments on $15.8bn of loans (including home loans, personal loans, credit card debt and overdrafts) and 44,471 had deferred their loan payments altogether, on $16.2bn of loans.
Faced with these growing debt figures, the LVR restrictions could have curtailed a bank’s ability to help existing mortgage customers whose debt-deferment pushed them into high-risk lending territory.
What it means for FHBs
So, given the state of the economy at the moment, the scrapping of the LVRs seems like a sensible move by the RBNZ to give banks even more wriggle room when it comes to helping out their existing customers, but the upshot is that it should have benefits for FHBs, too.
If you’ve a good income and a secure job, and can prove to a bank you have a solid financial head on your shoulders, you might find that it’s easier to get a loan, even if you don’t have a 20% deposit.
This will be especially beneficial to those FHBs who had hoped to use their KiwiSaver to fund their deposit, but have seen their balances shrink over recent months, due to the stock market slump.
Over the next few months, as the country, hopefully, moves onwards and upwards from our COVID-19 lockdown and into recovery mode, there will be opportunities for some. For those FHBs on a solid financial footing, the lifting of the LVRs might just be the boost they need to make the move into a first home.
If you are considering purchasing a property in the near future, Canstar has the tools to help you with your financial homework, including mortgage calculators and home loan comparison tools. Just click on the link below.
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