Squirrel: LVR Restriction Tips for First Home Buyers

It’s pretty tough going out there in the home loan market right now.

Higher interest rates and new, hyper-prescriptive responsible lending laws have seen affordability and borrowing power take some big hits in recent months.

That’s biting hard across the board – and will continue to as long as interest rates are up, and until there’s a review of the new CCCFA laws to make them a lot more fit for purpose. (I’m pushing hard on that second point, but there’s still work to be done.)

But probably the biggest roadblock for first home buyers in the short term will be the impact of the new loan to valuation ratio (or LVR) restrictions introduced late last year. The tighter LVR restrictions spell trouble for anyone with less than a 20 per cent house deposit.

But even though it might feel like the end of the world, the good news is these measures are only ever temporary – and things should start to ease up in the next few months. In the meantime, here are our tips to help give first home buyers the best chance of success under the current LVR conditions.

What’s the deal with the new LVR restrictions?

LVR restrictions are set by the Reserve Bank to help keep low deposit mortgage lending – where the borrower has saved less than 20% of the property value – under control.

When the housing market goes a bit rogue (like it did at the end of last year), they’re one of the best tools the Reserve Bank can roll out to help slow things down again.

And, man, have they slammed on the brakes.

Up until October 2021, banks could offer up to 20% of their total new mortgage lending to low deposit borrowers. Given that first home buyers usually make up about 26% of buyers in market, that meant there was always a pretty solid chance of getting a low deposit loan across the line. As long as you could demonstrate affordability, that is.

That all changed on November 1, 2021, when tighter LVR restrictions came into effect and cut the banks’ low deposit lending limit in half, to just 10%.

That’s a huge drop by anyone’s standards. And, in real terms, the impact of the new restrictions has been compounded by a shrinking market – as investors and speculative buyers step back in response to softening house prices and the removal of tax deductibility.

Why does that matter, you might ask? Because LVR restrictions are based on a proportion of total new mortgage lending. Fewer buyers mean fewer mortgages, and as the market gets smaller, so does the banks’ 10% low deposit lending allowance.

In the short term, anyone looking for a low deposit loan is going to find things really tough

For banks, the transition from a 20% to 10% low deposit lending allowance has been a really hard one to make.

At the moment, they’re still working through ways to honour any pre-approvals they committed to prior to November, while still sticking within the new limits. That’s made things extra tight, to the point where they’ve pretty much closed the door to any new low deposit lending for the time being – unless it’s a new build, where the LVR restrictions don’t apply.

But things should lighten up pretty soon…

Expectations are that the banks will start to relax a little bit in the next couple of months, as they come out the other side of the transition process. That said, as long as this really strict 10% new lending limit is in place, if you’re in the low deposit space, you’re probably still going to be right out of luck getting a loan or pre-approval from anywhere but your main bank.

At a broader level, the Reserve Bank should start to loosen LVR restrictions at some point this year, once they’re confident the market has slowed (which is happening at pace already) and has reached a point of price stability.

I’d expect that could happen as early as May or June – probably beginning with a move out to a 15% new lending limit, and then out to 20% again further down the line.

Tips for first home buyers to succeed under current LVR conditions

1. If you’re a couple, it’s a really (really) good idea to split your banking

Like I said earlier, as long as LVR restrictions specify a limit of 10% on low deposit lending, banks are pretty unlikely to look beyond their main bank customers.

So if you’re in the low deposit space, one of the smartest things you can do to maximise your chances is to give yourself two main banks to talk to.

That means if you’re a couple, and both with the same bank, one of you should look at moving elsewhere (which really just means moving your salary payment). You’ll need a minimum of three to four months’ track record with a bank before they’ll even think about lending to you – so if you want to buy this year, you should take this step as soon as possible.

It’s a bit of an inconvenience, no doubt, but the potential benefits are well worth it.

2. If you can get a property under contract, with a 10-working day finance clause – do it

Lender appetite is always changing, and there are still a few banks out there who are prepared to look at a low deposit application if it comes across their desk as a live deal.

If you know you have affordability, and can secure a property under contract with a 10-working day finance clause, there’s a solid chance a great mortgage broker will be able to find a bank to make the loan work.

The auction scene is an absolute no-go for any low deposit buyer right now. Trust me when I say you’d only be setting yourself up for disappointment.

The flip side of that is, with the slowing market, and auctions as tough as they are, we’re seeing a lot more property move to price by negotiation. That’s great news for low deposit buyers, creating a lot more opportunity to go down this contract route.

3. Remember, the banks might not be your only option

The fact is there’s just not a hell of a lot of low deposit lending happening with the banks right now, and it’s going to be that way for a while yet.

If you’re on a strong income, with good affordability and servicing, it could be that working with a non-bank lender is going to be your best bet to get you into your first home.

At Squirrel, we’ve designed our Launchpad product specifically for buyers who are excellent earners, but have struggled to save a 20% deposit in an environment where that can take years (and years, and years).

With Launchpad, we can lend to borrowers who have as little as 5% deposit saved – funded up to 20% through the Squirrel peer-to-peer platform, with the remaining 80% funded through one of our non-bank partners.

The affordability requirements are pretty tight, and that means Launchpad’s not for everyone – but if you have strong income (and good servicing), get in touch to chat about whether it’s right for you.

→ Related article: Squirrel’s Launchpad: Helping Kiwis into First Homes

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