HOW MUCH DEPOSIT DO YOU NEED TO BUY A HOUSE? CURRENT LVRs EXPLAINED
Most owner occupiers currently need a 20% deposit to buy a house, while for most property investors the deposit requirement is 40%.
The Loan to Value Ratio (LVR) for residential property buyers was changed by the Reserve Bank of New Zealand (RBNZ) / Te Pūtea Matua in 2021 to slow down the housing market.
LVRs look at the size of a loan compared to the value of a property. For example, if a house is worth $500,000 and the buyer has a deposit of $100,000, the home loan is $400,000, which makes an LVR of 80%.
LVR lending restrictions are tighter for investor loans than owner-occupier loans due to the higher risks associated with this type of loan. The current policy classifies investor loans as high-LVR if the loan amounts to more than 60% of the property’s value. No more than 5% of a bank’s total new investor lending can be high-LVR.
See also Real Estate Fees Exposed for Sellers
Most owner occupiers need 20% deposit
Most owner occupiers now need a 20% deposit when applying for a mortgage. It may be possible to get a loan with a smaller deposit (see more below) but RBNZ restrictions mean a bank cannot allow high LVR loans to exceed more than 10% of its total mortgage lending. Any loans above 80% of the property's value are classified as high LVR.
LVR restrictions were removed in April 2020 to ensure they didn’t interfere with Covid-19 policy responses aimed at promoting cash flow and confidence, but reinstated in early 2021.
A rapid acceleration in the housing market followed the end of the March-April 2020 Covid lockdown due in part, according to RBNZ, to the success of the health and economic policy responses to Covid.
RBNZ / Te Pūtea Matua reintroduced LVRs in early 2021 to reduce risks to financial stability caused by high-risk mortgage lending.
First home buyers grants and loans
Current LVR Exemptions
There are some exemptions related to borrowing to build a new home, for non-routine repair work (for instance, fixing leaky homes) on existing properties, bridging finance, refinancing of existing loans, shifting loans from one property to another (provided the total value of the loan does not increase) and loans made under the Kāinga Ora Mortgage insurance scheme (including First Home Loans).
New residences exempt
The LVR restrictions do not apply to new residential construction.
Loans to people building a new residence are exempt and the new rules do not prescribe the size of the deposit needed for new builds. The borrower must either commit to the purchase at an early stage of construction or be buying the residence (within six months of completion) from the developer. This exception applies to both owner-occupiers and residential property investors.
Kiwibuild is included in the exemption.
Borrowers with owner occupied and investment property collateral can use the combined collateral exemption to obtain finance up to 70% of the value of the investment properties and 80% on their owner occupied property.
Checklist for Buying a Home
Do LVR restrictions prevent me from borrowing if I only have a 5 or 10 % deposit?
That depends on your bank and your individual circumstances. Your bank may be prepared to offer you a low-deposit (high-LVR) loan, depending on what other low-deposit lending commitments it has made to other borrowers. Bank lending is also subject to each bank’s own internal lending guidelines and policies. You need to talk to your bank to find out about these policies.
Click here for more help when buying a property.
Significant increase in new investors
According to the Property Investors Federation there was a significant increase in new investors entering the market in the 12 months to February 2021. They were investors who purchased on the proviso house prices would continue to rise at the same levels. In some areas, the value increases continued while in a handful of others, including Auckland and Wellington, they either slowed or declined.
The PIF advises that capital gains should only be considered a bonus and not be relied on.
Slowing down lending
LVR restrictions are one of the Reserve Bank’s tools designed to reduce the risk associated with ‘boom-bust’ cycles and are a form of speed limit on banks.
RBNZ has said highly indebted borrowers, especially investors, are vulnerable to house price corrections, and prone to rapid fire sales that could amplify a downturn.
What buyers look for in a house
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Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
Page updated August 31, 2022 by Trish Willis | Member of Property Institute of NZ (IPAC)
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