The Loan to Value Ratio for residential property buyers has been changed by the Reserve Bank of New Zealand (RBNZ) to slow down the housing market.
From March 1, 2021 LVR restrictions will increase the deposit required by property investors to 30% while for owner occupiers it will be 20%.
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.
LVR increase to 40% for property investors
From May 1, 2021 the deposit required from property investors will be increased further to 40% and that required from owner occupiers will remain at 20%.
RBNZ / Te Pūtea Matua has introduced the more stringent LVR to reduce risks to financial stability caused by high-risk mortgage lending. The LVR restrictions do not apply to new residential construction.
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 is imposing the new LVRs to guard against the risk of a sharp correction in the housing market, with evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.
LVR restrictions are one of the Reserve Bank’s tools designed to reduce the risk associated with ‘boom-bust’ cycles,
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.
Tighter restrictions on mortgage lending
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%.
From March 1 2021, when banks consider approving a mortgage:
- LVR restrictions for owner-occupiers will be reinstated to a maximum of 20% of new lending at LVRs above 80%.
- LVR restrictions for investors will be reinstated to a maximum of 5% of new lending at LVRs above 70%.
From 1 May 2021:
- LVR restrictions for owner-occupiers will remain at a maximum of 20% of new lending at LVRs above 80%.
- LVR restrictions for investors will be further raised to a maximum of 5% of new lending at LVRs above 60%.
Reinstating the LVR policy will also reinstate the existing exemptions applying to the LVR restrictions for both owner-occupier and investor mortgages.
Significant increase in new investors
The Property Investors Federation has said 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. The PIF advises that capital gains should only be considered a bonus and not be relied on.
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Article created February 16, 2021 | About