The Reserve Bank announced on 21 April 2020 that it proposed to remove loan to value ratios (LVR) in a response to the economic downturn expected to be caused by COVID-19. This is potentially good news for those entering the property market as discussed below.
What are the current LVR rules?
The LVR rules were put in place in 2013 in an effort to restrict the amount of lending that banks could make to first home buyers and rental property investors who had only had small cash-deposits.
Put simply, banks are only allowed to loan up to a certain percentage of a property's value. The current LVR rules require that most first home buyers must have a 20% deposit (and property investors need 30%).
The proposed changes to the LVR rules
Due to COVID-19 putting stress on the housing market, the Reserve Bank proposes to remove the LVRs on mortgage lending for at least the next 12 months. They will then re-assess whether to reinstate LVRs given the economic impact of COVID-19 will be clearer at that time.
The Reserve Bank has asked that banks give their feedback by 28 April 2020, with a decision to be made "promptly after that".
Possible good news for buyers
This means that you may be able to obtain the necessary finance to purchase a property even though you have a deposit than is less than 20%. As a result some people who were not previously able to obtain a mortgage may be able to do so. This may be positive news for some first home buyers as KiwiSaver balances have dropped and therefore reducing their potential deposit towards a property.
However, we would urge caution as just because the Reserve Bank relaxes the LVR, many banks may elect to stick to conservative internal limits. Banks will still look at other factors such as serviceability tests, amount in savings, whether house values may fall, and whether the borrower has income to sustain the loan.
Alternative funding options
If the banks don't loosen their requirements this may mean that first home buyers may still need to keep saving and look at other methods of obtaining a large enough deposit for that first home. Sometimes help from parents such as a gift, a loan or to act as a guarantor may be available.
Receiving help is not without risk for the parents, especially if the child has a spouse or de facto partner or later marries or enters into a de facto relationship. There are many ways to deal with gifts or loans from parents and Cavell Leitch can give advice on the best way to record these arrangements to minimise risks for all parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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