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The Reserve Bank removed LVR rules until 2021 – what does it mean for you?

As you’ll have heard, in April 2020, the Reserve Bank of New Zealand decided to remove loan-to-value restrictions for a full year.

So, if you were working hard to put together a deposit for a property purchase, you may be wondering: what does this mean for me? Here are some key things to know.

What are LVR restrictions, anyway?

Reserve Bank-imposed loan-to-value restrictions, often referred to as LVR rules, were introduced in 2013. They were intended to keep a lid on house price inflation and provide a buffer in case of a housing value downturn.

The rules have been tweaked over the years. At the point when they were lifted, banks usually required borrowers to have a 20 per cent deposit for a first-home mortgage, and a 30 per cent deposit for an investment mortgage.

Now that LVRs have been removed, however, it doesn’t mean that you can buy a home with any-size deposit.

LVRs are just one part of a bigger picture

Each lender (both bank and non-bank) has its own lending criteria that they require buyers to meet, and the size of the deposit has always been just one of them.

Lenders need to be responsible. This means that they must assess mortgage applications based on the ability of the borrower to service the loan. To determine this, they look at a range of criteria, including steadiness of income and employment, credit history, savings and spending habits, and level of debt.

Combined together, these factors allow lenders to determine your ability to repay the mortgage now and in the long term – your ‘affordability’.

In a softened economy, and with an increasing number of New Zealanders experiencing heightened levels of financial insecurity, banks are likely to pay even more attention to borrowers’ affordability. In other words, they will still want to see people with strong, reliable income making offers on properties that they can afford, with the ability to service the loan being paramount.

Also, it’s important to note that low-deposit mortgages have always been available for borrowers who could pass strict serviceability tests, even when RBNZ-required LVR restrictions were in place. And just like then, the bigger your property deposit is, the more options you’re likely to have when looking for finance.

Maximise your chances

Looking to buy property? There are a few ways to make sure your application stands out.

  • Check your account conduct. Make sure you don’t have any instances where you’ve gone into an unarranged overdraft.
  • Have a solid employment history. Lenders will check for fluctuating hours or a patchy work record. If your employment status has been affected by Covid-19, unfortunately, it’s still important to show that you have a good income and that’s not likely to go anywhere.
  • Keep affordability top-of-mind. As we said, affordability is always crucial when taking on substantial commitments, like a mortgage. And a realistic application is more likely to be looked upon favourably at present. Please get in touch if you’d like to discuss how you can improve your borrowing power.
  • Check your credit rating. If there’s anything negative on there, it could count against you. Make sure there’s nothing incorrect on your file – you can apply to have this corrected. And if there are any unpaid defaults, make sure you pay those before applying.
  • Have a plan. If you don’t have a lot of deposit, or there are any other aspects of your loan that look shaky, think about what else could be of help. Are you in a good position to withdraw part of your KiwiSaver money or access a first-home grant?

And of course, get in contact with us. Not all lenders are created equal; some non-bank lenders, for example, may be more appropriate than banks if you’re self-employed. By looking at your financial situation, we can work with you on a feasible action plan.

Who will the rule change really help?

The rule lift is likely to be a big help for people who had minimal equity to begin with, especially if property prices soften in many areas.

If you’re in this position, you may find you have a lot more options than you might have a month or two ago. Once again, please don’t hesitate to contact us: we’re here to help.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.