As part of a strategy to keep residential property prices in check, the Reserve Bank has introduced changes to loan-to-value restrictions (LVRs) for property investors. The restrictions, which apply from 1 October 2016, call for a 40 percent deposit for residential investment properties.1
How to calculate your loan-to-value ratio
If you’re a property owner already, you’ll know about loan-to-value ratio. It’s the amount of your loan compared to the value of your property and is calculated by dividing the amount of the loan by the value of the property. For example, if a property is worth $750,000 and you have a deposit of $150,000 the LVR will be 80 percent; ($750,000-$150,000)÷$750,000 = 80%.
In recent times property prices in many areas of New Zealand - particularly Auckland, Tauranga and Hamilton - have been increasing rapidly. Much of this growth has been fuelled by property investors and there’s concern the boom will put the country’s financial stability at risk.
New borrowing and lending restrictions
In an effort to rein in the housing market, the Reserve Bank is introducing limits on how much investors can borrow and has also re-tightened limits on how much banks can lend to people with house deposits of less than 20 percent.
Here are the new restrictions:
- No more than 5% of a bank’s overall lending can go to residential property investors across New Zealand with an LVR of more than 60% (i.e. a deposit of less than 40%). The deposit doesn’t have to be all cash; it can be a mix of cash and equity, or equity alone.
- No more than 10% of a banks’s overall lending can go to owner-occupiers across New Zealand with an LVR of greater than 80% (i.e. a deposit of less than 20%).
- Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, will continue to be exempt.
To discourage panic buying, the Reserve Bank expects banks to observe the spirit of the new restrictions in the days leading up to the new policy taking effect.
See the Reserve Bank’s press release about LVR restrictions.