In the excitement of finding a property and securing a loan, though, first home buyers can sometimes overlook the importance of the loan to value ratio (LVR).
What is Loan to Value Ratio and how does it work?
LVR means the percentage of your house price that you are borrowing and how big your deposit is.
So, how does LVR work?
Here’s how LVR works. If you borrow 80% of the value of the property, your LVR is 80%. Or in dollar terms: if you’re buying a $500,000 home with a $100,000 deposit, that’s an 80% LVR loan. In other words, low deposit home loans will have a higher LVR than a higher deposit home loan on a house of the same value.
LVRs are important for two reasons: they tell you how much you can borrow, and what interest rate you will pay on your loan.
Can everyone get low deposit home loans?
Unfortunately, not everyone can get low deposit home loans (depending on what you count as low, of course). The Reserve Bank of New Zealand (RBNZ) has put limits on how much mainstream banks can lend, which might affect your home buying plans. These are the three main restrictions:
|Homes outside of Auckland||In most cases, the banks are only allowed to lend 80 per cent of the purchase price – a Loan to Value Ratio of 80%. Having said that, the banks can lend a higher percentage on individual homes – providing they don’t do so for more than 15% of their new lending.|
|Owner occupier loans in Auckland||Homebuyers in Auckland also need a 20% deposit. Banks can only lend above this on 10% of new lending.|
|Auckland investment property||Investors in Auckland must have a 30% deposit in most cases. The banks are only allowed to lend more than this to investors for five per cent of their new lending.|
The Loan to Value Ratio is important for a number of reasons. The most important reason for first home buyers is that if you borrow more than 80 per cent of the cost of the home, you’ll need to pay what’s called “lenders mortgage insurance” or a “low equity premium”. This is a one-off premium for an insurance policy that the lender owns but the buyer pays for. The insurance protects your lender against losing money in the event that you are unable to pay your mortgage repayments and the property has to be sold.
Interest rates vary by LVR
When it comes to fixed-rate loans, the interest rate that a lender will offer you on a loan depends on your LVR (although interestingly, this doesn’t apply to floating loans). The table below shows the interest rates currently available from lenders on the Canstar database. Please note these rates are current at time of writing; please check our comparison tables for our regularly updated home loan rates.
|Maximum Interest Rate|
|LVR of 80%|
|1 Year Fixed||4.25%||4.55%||4.85%|
|2 Year Fixed||4.15%||4.55%||4.89%|
|3 Year Fixed||4.39%||4.83%||4.99%|
|LVR of 90%|
|1 Year Fixed||4.25%||4.69%||4.85%|
|2 Year Fixed||4.25%||4.74%||4.89%|
|3 Year Fixed||4.65%||4.89%||4.99%|
Source: www.canstar.com.au. Rates current as at 6 June 2016.
Why are Loan to Value ratio limits needed?
The LVR limits were designed to slow the astronomic rise in Auckland property prices. It may seem unfair to not allow all Kiwis access to low deposit home loans. But, if property price rises don’t slow down, it might become near impossible for ordinary New Zealanders to get on the property ladder.
What’s more, the RBNZ wants to ensure that Kiwis are protected from losing their homes if the property market “corrects” itself (crashes), and LVR restrictions help to prevent such losses.
Who can have a higher LVR and pay a lower deposit?
First home buyers
First time buyers can get around the limits by buying new houses, buying apartments, or using the government’s Welcome Home Loan scheme. With a Welcome Home Loan you only need a 10% deposit, which makes buying easier. However, you will need to pay Lender’s Mortgage Insurance (LMI) premium of 1% of the loan account, which can add up quickly.
The RBNZ’s LVR limits only apply to the banks. That doesn’t apply to “non-bank lenders”, credit unions, and peer to peer lending platforms.
Extending the mortgage has almost become a national pastime in New Zealand. Mortgage top ups, however, come under the same rules as other home loans and you’ll be out of luck if the top up puts you over 20% to 30%.
Of course, if you’re a First Home Buyer, the bank will be more likely to make your loan one of the 10% of new loans that can exceed the LVR limits.
There are other exemptions from the LVR limits, such as loans for investment properties secured against more than one house, and for short short-term bridging loans. It’s worth checking out the rules in detail if you’re doing something non-standard, such as borrowing to build a minor dwelling or sleepout, or mortgaging your home to start a business.
Finding a way around Loan to Value Ratio rules
Finally, there’s often a way around rules. The LVR rules don’t necessarily stop you buying, because you can borrow more if you pay Lenders’ Mortgage Insurance, or you can take advantage of some of the grants and special loans available to First Home Buyers in New Zealand. So, do talk to your bank or get a mortgage broker to negotiate on your behalf.
Buying a house when banks demand higher deposits
There are lots of ways to work within the system and plenty of Kiwis are finding new measures to buy a house with 10% or even smaller deposits.
I’ll let you into a little secret. Here’s how they do it:
Bank and beyond: steps to buying a house
|Bank||The RBNZ has restricted banks’ ability to offer loan to value ratios (LVRs), so most buyers need a 20% deposit. But banks are still allowed to do 10% of their lending on low-deposit home loans.|
|Housing New Zealand||If you qualify for a Welcome Home Loan, supported by Housing New Zealand, you’ll only need a 10% deposit. But the house price and income caps mean you can’t buy anything too flash.|
|Housing Association||The New Zealand Housing Foundation allows you to buy part of a house, live in it, and share ownership with the association until you can afford to pay it off.|
|Kiwisaver||You can withdraw your own savings and employers’ contributions from KiwiSaver to buy your first home. That’s as well as the deposit subsidy, which can add up to $10,000 for a couple.|
|Parents||If you’re lucky enough to have parents who can help with a deposit, it’s another step to buying a home. But banks often want evidence that you’ve saved some of the deposit yourself.|
|Mortgage Broker||Mortgage brokers know which banks are willing to lend on lower deposits. They can sometimes help get around the rules about having to have saved for your deposit, and they can also plead your case.|
|Credit Union||Credit unions sometimes have different lending criteria to banks, such as allow to no deposit home loans from NZCU Baywide. They consider how much rent you are paying to decide how much they’ll lend.|
|Reserve Bank||The 20% LVR rules are only temporary and there’s a chance they may be relaxed in the future.|
|New Home Builders||New homes are exempt from the RBNZ’s LVR restrictions. New homes tend to be more expensive than existing homes, but it’s good for people who wanted to buy a new property.|
Please note this is general information available at time of writing.
Beware of what you wish for
Finally, beware of what you wish for. Sometimes if you borrow more than 80% of the value of the home you’re subject to a hidden cost called a low equity premium (AKA mortgage lenders insurance or mortgage indemnity insurance). It may be worth saving a little extra to avoid this.