The Limit for High LVR Mortgage Lending – What is it and how can this affect me?

What is a High LVR mortgage and how does the RBNZ affect what you pay for a mortgage in New Zealand? High LVR mortgages are mortgages or home loans that have a higher loan-to-value ratio (LVR) in comparison to the LVR set for other loans. Basically mortgages with a higher LVR means the amount you borrow is much higher in relation to the amount of deposit you are required to outlay. This week Queen City Law Property and Commercial lawyer Jan Chen changes to the LVR rates by the Reserve Bank. To read more articles by Jan Chen click here. To read more about Jan, click here. Remember if you are thinking of becoming a financial service provider get the best legal advice as early in the process as possible. To contact our property lawyers click here. To download the full article as a print friendly PDF click here.RBNZ

The Reserve Bank New Zealand (“RBNZ”) announced on the 20th August 2013 that it will impose 80% restriction on Loan-to-value ratio (“LVR”) on any lending against residential property. Any bank in New Zealand is required to limit their residential property lending over 80% LVR to 10% of their total lending portfolio. This new LVR restriction just came into force on 1st October 2013.

A LVR is the ratio of how much a bank lends against a residential property compared to the value of that particular property. Limiting lending over 80% LVR means that more home buyers will need to contribute equity equivalent to at least 20% of the purchase price.

The RBNZ introduced this LVR restriction to limit the risks involved in the property market. Housing lending accounts for almost 50% of the bank lending in New Zealand.[1] Housing prices in New Zealand have been on the rise in the last few years, especially in the Auckland region. This is considered high even at international standards when compared to disposable income and rent. Given fear of bubbles in the market and the potential impact of a significant fall in house prices in the future, the RBNZ considered it necessary to increase the threshold of current lending criteria. It is less likely for home owners to default on their mortgages when they have contributed more equity – as the loan is more affordable compared to highly-indebted home owners.

Banks can still lend to borrowers with low deposits, however they must limit this to 10% of their lending portfolio. The RBNZ did not state how long the LVR restriction will be effective for, however it is expected that this restriction will persist until the property market becomes steady. On-going compliance of this LVR restriction will be managed by the RBNZ, and failure to comply with the restriction may lead to the cancellation of banking licences.

The LVR restriction essentially means that potential home buyers will most likely need to save up a minimum 20% equity before they are able to purchase a property. Auckland has experienced the highest growth in property price over the last few years, with the average price of a property being $639,385 in the year to June 2013 (according to statistics provided by QV).[2] If you are to purchase a house at an average price in Auckland, you will need to save up to $127,877 under the new LVR restriction.

As of several days ago, ASB Bank has withdrawn all outstanding pre-approved loan offers for borrowers with less than 20% deposit to ensure compliance with the new lending rules.

What can I do?

Potential home buyers are encouraged to save up more equity for their proposed purchase. The Kiwisaver First Home Withdrawal Scheme and First Home Subsidy may also be of assistance. Please refer to our solicitor Tina Hwang’s earlier blog on this topic.

The Government has announced changes to the existing KiwiSaver First Home Deposit Subsidy Scheme. The house price threshold in the Auckland region has increased to $485,000 from 1 October 2013, and the income cap will change to a new two-tier system of $80,000 for one buyer, and $120,000 for two or more buyers. We may also see the growth of non-bank lenders.

[1] RBNZ Policy Statement

[2] Interest .co.nz

Our team has substantial experience and a proven track record in the sale and purchase of: Cross Leases, Freehold properties, Leasehold properties, Unit Titles (Apartments and Carparks), Subdivisions and Residential Tenancies. Although conveyancing can be straightforward, sometimes mistakes can be costly. Accordingly, we strongly recommend you contact us as early as possible when you are buying or selling to ensure that we can add value to your requirements. We will do our best to ensure that your transaction is completed smoothly and efficiently and keep you informed as to progress. Our fees are highly competitive and we can also assist with structuring your purchase and in some cases you may require assistance with the formation of a family trust, a limited liability company or partnership or any other entity appropriate to your requirements.

We also suggest that you click on Legal Checklists in our Practical Law Library as you will find useful information there which will assist you.

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