When compiling this year’s ratings of home loan products in New Zealand, the Canstar Research team had a look into whether lending institutions are getting stricter about how much they want in a deposit and what they are willing to lend to borrowers. As a general trend, we can see banks requiring higher deposits, but it’s not necessarily such a bad thing, as it means you pay less in interest over the life of your loan.
What is an LVR?
The loan-to-value ratio (LVR) is the percentage of a property’s purchase price that a bank will allow someone to borrow. In practical terms, it represents the size of deposit the bank will require from a borrower in order to give them a loan for the property.
What is a high-LVR loan?
The Reserve Bank states that borrowers with a high-LVR loan of more than 80% (meaning a deposit of less than 20%) are “often stretching their financial resources”. High-LVR lending has a different definition in Auckland, where mortgages of more than 70% (deposits of less than 30%) are considered high-LVR.
In total, New Zealand took out $342 million in higher than 80% LVR home loans in January 2016 (RBNZ). High-LVR loans make investors vulnerable to increases in interest rates and economic shocks such as a recession, if they are not able to increase rental prices to meet the higher loan repayments.
This is more of an issue for investors, as owner occupiers and first home buyers typically borrow more than 80% of the purchase price. First home buyers and owner occupiers often fall under certain exemptions from the strict LVR requirements, such as first home buyers, construction loans, loan portability, bridging finance, refinancing, Housing New Zealand loans, or combined collateral.
What is a low equity margin?
Another thing to consider when looking at high LVRs is that banks including ASB and Sovereign have recently begun to charge a “low equity margin” (LEM) on high-LVR home loans. This is an extra percentage of interest charged on top of the agreed interest rate.
- 80% – 85% LVR: 30% p.a.
- 85% – 90% LVR: 75% p.a.
- 90% – 95% LVR: 30% p.a.
- >95% LVR: 50% p.a.
Measures such as low equity margins prevent investors or low-income borrowers from taking out huge mortgages which they cannot realistically expect to repay.
Why do banks care about LVRs?
LVRs are one way for banks to control their investment risk, and there are two main reasons why they are a vital part of our home loan system in New Zealand.
First, the law requires lending institutions to lend responsibly. This means not lending more money to people than they can realistically afford to repay. A lower LVR with a larger deposit means a smaller loan for the borrower to repay, and the borrower also ends up paying a lot less in interest over the life of the loan.
As you can see from the table below, there’s a big difference in how much you pay per month and how much interest you pay over the life of your loan when you have a lower LVR of less than 80%. For example, you could save up to $502 per month in interest by saving a 25% deposit instead of a 5% deposit, meaning savings of $70,695 over the life of your loan.
Secondly, banking institutions have to stay below the ‘speed limits’. This refers to the “speed bump” legislation introduced in New Zealand in 2013 in order to stop bad lending practices and to tame the appetites of investors and keep housing affordable.
What LVRs are banks currently offering?
Our research for this latest ratings season found a general trend of banks offering lower LVRs, hence requiring a larger deposit from borrowers. The table below summarises the LVR range we found to be available for different types of home loan:
|Profile||Minimum LVR||Maximum LVR|
|Investment (Fixed Rate)||75%||95%|
|Investment (Floating Rate)||75%||95%|
|Line of Credit||80%||95%|
|Residential (Fixed Rate)||80%||95%|
|Residential (Floating Rate)||90%||95%|
|Source: www.canstar.co.nz. Based on products assessed by Canstar|
Due to the RBNZ speed bumps, banks have had to tighten lending standards and reduce their maximum LVR requirements.
How much could you save with a lower LVR?
|How you could save money with a bigger deposit and a smaller loan|
|LVR||Deposit Amount||Loan Amount||Interest paid
over life of loan
|Source: www.canstar.co.nz. Based on a $400,000 property purchase price, and a residential home loan with a 25-year loan term, at the average interest rate on our database for a floating rate home loan (5.62% at time of writing).|
So what deposit do you need in today’s property market?
As a general trend, data from the Real Estate Institute of New Zealand (REINZ) shows residential house prices are slowly on the rise, from the top of the North Island to the bottom of the South Island.
When it comes to residential properties, here are the house prices you can expect at present and what you have to borrow if you want to put down a 20% deposit:
|Where?||Median Sale Price||20% Deposit||80% Loan|
/Bay of Plenty
|Source: REINZ, Median Sale Prices, Residential Properties, February 2016.|
REINZ also provides statistics on prices for rural farming properties and lifestyle properties (non-farming), so visit their website to find out how much you would need to borrow for a farm. For example, in Canterbury the median sale price for rural farming properties is over $1,850,000, while the median sale price for lifestyle properties is just over $632,500.
The latest statistics from the Reserve Bank reflect rising house prices in that we’re borrowing more than we did last year. $4,118 million worth of new mortgages were granted in January 2016, compared to $3,565 million in January 2015 (RBNZ).
No matter what LVR you have on your home loan or the purpose of the loan, it’s important to make sure your loan provides outstanding value in terms of features and fees. Canstar’s star ratings can help you compare home loans quickly and easily. In 2016, we researched and rated 58 home loan products from 10 providers in New Zealand.