Changes to the Loan to Value Ratios
The Reserve Bank have come out and loosened their restrictions on Loan to Value Ratios (“LVR”) for 12 months.
To recap briefly, the Reserve Bank introduced the LVR rules to slow the property market down. With Covid, the heat has gone so they’ve removed the rules. The LVR rules meant that property owners needed to have a larger deposit prior to buying either a family home or investment property.
Put another way, a 30% LVR restriction on rental properties meant an investor needed $150,000 (in cash or equity in another property) to buy a $500,000 rental property. In theory, you could buy the property now with no deposit.
This initially got a few people relatively excited (in rental property land anyway). We’re advising people to slow down a little.
All banks are restricted (rightly so) by a set of responsible lending obligations. This ensures they only lend to people who have the income to support the lending, and have sufficient equity. Remember also that before the LVR rules came into place, banks still required investors to have a deposit – they weren’t giving everyone (only some) 100% (or more) lending.
The good news is that this should mean, we hope, that more cash is available for:
- Small business owners. We don’t recommend drawing a loan against your home to prop up for business – but at the end of the day flexibility is always an advantage.
- First home buyers. Many first home buyers have been impacted by their Kiwisaver values dropping, so the relaxation of the LVRs should mitigate the drop in Kiwisaver balances.
- Property investors. With prices (potentially) sliding backwards, more free LVRs will mean fewer investors exit the market, or new investors are able to come in.
- Bare land and construction. With less restrictions on lending more people should be able to build new, improving overall building stock.
That said, we don’t know how banks are going to respond. So it’s very much a case of watch this space until we see banks lending under the new LVRs.
At the same time, here’s what we’re recommending to our customers for the moment:
- Be careful drawing down more debt. If you buy a new property under the relaxed LVRs, then sell a property when they tighten after 12 months, then you may struggle to manage lending levels.
- Take the time now to reassess securities. If you have multiple properties, there may be an opportunity to have a property released from the bank’s security.
- If you have given your bank a security over your family home to support your business, then check out the interest rates. With the relaxed LVR rules you may be able to slide a higher proportion of your lending onto residential (rather than business) interest rates.
Again though, the caveat is that we don’t have the full details available as yet. It’s a matter of how the banks manage their obligations under the responsible lending rules, against the additional flexibility the Reserve Bank has given them.
As always, please reach out if there is anything you’d like to cover for your particular situation.