Updated: Nov 2020
LVR has to be the most talked about thing in the Mortgage industry in the past few years, and it's with good reason. It's probably the single most important thing when it comes to assessing a lending proposal.
For those of you who don't know what it stands for, LVR is "Loan to Value Ratio" - Essentially it is the percentage of lending you have, divided by the value of your property. If you have $80K lending on a $100K property then your LVR is 80%.
So why is LVR so important?
It all comes down to risk.
When a bank lends you money it of course assess your ability to repay that money but at the end of the day if you don't make your payments all the bank can do to recoup its money is to sell your property. Under a Mortgagee sale you're unlikely to get the full value of your property so by lending only a maximum of say 80% LVR the bank ensures that even if your property sells for 20% less than it's worth, they'll still get their money back.
That is why banks don't want to take risk on lending at a high LVR and will restrict only some of their lending in this space. At the end of the day this is what caused so many issues during the GFC. People had borrowed 100% LVR on properties with inflated values and when they couldn't meet the payments the bank could not recoup their money and those banks fell over (Google Fannie May and Freddie Mac)What are LVR restrictions?
The Reserve Bank imposed its first round of LVR restrictions in 2015. This limited the amount of lending each bank could do to people over 80% LVR. These have since been relaxed slightly and as at September 2019, banks can lend up to 20% of their total home loans to people over 80% LVR (or with less than 20% deposit, to put it another way)
In 2016 the Reserve Bank dealt another blow, restricting banks to lending a maximum of 60% LVR to people with investment properties. There is the same type of exemption on this in the way that they can lend 5% to people over that level in the same way that they can with the 80% rule.
The good news is that they've relaxed this so that the banks can lend up to 70% LVR on investment properties (as at September 2019). It's still a fair chunk of deposit required to buy an investment property!
Post Covid, the Reserve Bank removed these restrictions entirely meaning investors could buy with at 80% LVR and there was no limit on the banks around how much of their lending could be done at higher LVR's to owner occupied buyers. Although these restrictions were removed, some banks never changed their own policy and others introduced tighter measures anyway meaning the lending was still going to the types of clients the banks were interested in having as clients.
In November 2020 the Reserve Bank announced that they would be reinstating the LVR restrictions from March 1 2021. For those banks that hadn't changed their policies, there was no change but for those who had, they quickly either immediately changed their policies to reflect the updated restrictions or have since announced from when they will be changing them.
With a lower LVR, your equity is like cash
When it comes to buying a second property, or borrowing some more money to spend on something else you can use the equity you have and borrow money to essentially turn it in to cash without selling your property.
This is especially handy when you want to buy an investment property. Say you have a house worth $600K and owe $200K. Your LVR is 33%. You can borrow up to 80% of the value of that property... or $480K (still with me?) So you've essentially got $280K to put as a deposit on another property.
If you want to then buy a rental property for $560K, your LVR on that new property would only be 50%. Well below the 70% threshold.
Hopefully with a better understanding of the above you can ensure that you're in a good position to maximise your options. We're here to help with that.
Whether you've got a high LVR or a low LVR or just want to know more about how this will effect you personally then we'd love to hear from you.
Simply contact us or email office@mymortgage.co.nz
We look forward to discussing this with you and if you found this information helpful please feel free to share!
Adam, Claire, Greg and the My Mortgage team