Many people have already started to ask what it means to have the LVR restrictions removed… and given the current economic environment it’s a very good question.
So what does it really mean?
Let’s firstly cover off what the LVR restrictions were and why they were introduced as this gives some insight into why the Reserve Bank is now comfortable to have the LVR restrictions removed.
We will then cover off what the banks may do now that the LVR restrictions have been removed, but also explain how they have their own LVR rules too.
Finally, let’s look at how we think this may change things.
The Reserve Bank has decided to remove mortgage loan-to-value ratio (LVR) restrictions for 12-months. The decision was made to ensure LVR restrictions didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the COVID-19 pandemic.
They will review this again in a years time and make a decision about the most appropriate setting for LVR’s then.
Why Did We Have LVR Restrictions
The LVR restrictions were introduced in August 2013 to help slow a booming property market and in particular to try and ensure that first home buyers had an advantage over the property investors. The reason given was that borrowers with LVR’s of more than 80 percent (less than 20 percent deposit) are often stretching their financial resources, and are more vulnerable to an economic or financial shock such as a recession or an increase in interest rates.
It was seen by many as an over reaction and prompted by the fallout of the Global Financial Crisis (GFC) when countries started to look at ways to safeguard financial stability.
They were also introduced as a temporary measure.
At the time the banks had high confidence in the property market and were lending to 95% for first home buyers and up to 90% on investment properties too. The restrictions still allowed the banks to do a percentage of their lending to people with less than 20% deposits, starting at 10% of all new lending and later being ‘eased’ to 15%.
The LVR restrictions came into effect in October 2013 and then in December 2013 modifications to framework for restrictions on high-LVR residential mortgage lending, including exemption of construction lending was introduced. There was (and still is) a housing shortage so they wanted to encourage people to build new houses and therefore increase the supply.
The other exception was the First Home Loans which was previously known as the Welcome Home Loans. First Home Loans are issued by selected banks and other lenders, and underwritten by Kāinga Ora which was previously Housing New Zealand. These loan allows the lender to provide loans that would otherwise sit outside their lending standards but the borrowers have to meet a criteria which includes income and house price caps that made it very difficult for many people to access.
There has been plenty of commentary over the years about these restrictions and whether they worked or not.
How Might The Banks React To The Changes?
When the LVR restrictions were introduced the banks blames the Reserve Bank and said that they had no options, but that was almost 7-years ago.
So how will the bank adjust to life without the Reserve Bank’s LVR restrictions?
The important thing to understand is that banks all have their own lending policy to manage the risks and that also includes LVR rules.
The banks own LVR rules are often related to the types of properties rather than the borrowers.
Examples of these at the moment where exempt of the LVR restrictions are;
- Freehold Residential Properties – some banks will lend up to 95% on these
- Terraced Housing or Townhouses – some banks will lend up to 95% on these
- Apartments (purpose built) – some banks will lend up to 90% on these
- Apartments (serviced) – some banks will restrict the lending to 65% on these
- Lifestyle Blocks – most banks will lend up to 80% on these
- Bare Land – some banks will restrict the lending to 50% on these
At this stage we don’t know how the banks will react to the removal of the LVR restrictions, but the expectation is we will not see any immediate changes to their own rules.
Let’s Look At What Changes We Might See
This is a bit of guesswork but we have tried to think how the banks and also the non-bank lenders might react.
Changes you might see from the banks are;
- The banks will not be restricted to managing their lending so closely, but we are pretty sure that they will also not want to be doing too much high LVR lending so internally we expect they will limit what level of new borrowing will be over 80%. The expectation is that they will be looking at the borrowers profile more carefully (and especially income) which is an extension on what they have already been doing. As mortgage brokers we have been restricted in the past whereby the banks are not willing to pre-approve finance for high LVR lending, and this is one area that we expect to see an improvement.
- The banks will be monitoring property prices closely and may restrict lending in areas they deem higher risk. Areas like the Queenstown area as an example may be somewhere where they restrict lending as they would expect to see values drop; however in a city like Auckland they may feel more comfortable with values. This type of geography based LVR rules could be something that is not introduced as a hard policy, but instead will be something that they will manage over the next few months as we get over the COVID-19 financial shocks.
- The banks may increase the LVR limits for rental properties from 70%, but we are not expecting to see them suddenly increase to 80% or more and any changes may take a few weeks before they are announced.
- The banks also have all applied either a low equity fee or margin to loans that exceed 80% of the property value. This is the way that the banks seek to get additional compensation for taking more risk with their lending and we do not expect to see any changes to this for the foreseeable future. We would love it if they did drop these costs, but
The non-bank lenders may make changes too.
While the LVR restrictions were put in place for the banks which are all controlled by the Reserve Bank, many of the non-bank lenders we also captured by the rules as they have wholesale funding lines with the banks. The non-bank lenders were effectively told to act in the spirit of the LVR restrictions.
So now with the LVR restrictions removed we might see the non-bank lenders looking at making some changes to their lending policies. Again, with the non-bank lenders we are not expecting to see any major changes but they may look at ways to create a point of difference whilst still managing the risks.
Many of the non-bank lenders have operated with a pricing matrix meaning that as the risk increases then the interest rate charged increases too. One of the things that has influenced the interest rates has always been the LVR so they charge extra as the LVR increases.
Changes you might see from the non-banks are;
- They may look to lend to higher LVR’s for good applicants buying in low risk areas; that is people that may be just outside of bank criteria but have good incomes.
- They may look to increase the LVR’s for rental properties, again depending on the applicants and locations of the properties.
- Higher LVR bands may have a premium cost model to offset a higher risk
Ultimately the non-bank lenders need to find ways to make their offering different to what the banks can offer so we’re sure they will be looking at what they can do, but they will be watching the property values too as they rely more on values due to the shorter loan terms that many work with.
We cannot yet provide answers, but we will be following closely.
Feel free to contact any of our advisers with your questions or to discuss a scenario.
We are good at working on ways to make situations work with banks and non bank lenders.