The new LVR rules: What first home buyers and investors need to know

COMMENT: The Reserve Bank of New Zealand has made good on its promise to adjust the loan to value ratio (LVR) restrictions.

From March 1, the deposit requirement for owner-occupier mortgages will be 20 percent, with a few exceptions (mainly new builds and Kāinga Ora's First Home Loans Scheme). Investors will need to bring a 30 percent deposit, moving to 40 percent from May 1.

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The new rules come almost a year after the Reserve suspended the LVR rules in March 2020, in the aftermath of the Covid-19 outbreak. Most banks upped their deposit requirements for investor lending to between 30% and 40% after the Reserve announced in December last year that it was considering reinstating the LVR restrictions in March, so this announcement just binds the banks and makes the policy official.

Explaining why the Reserve was taking action, the Bank's deputy governor and general manager of financial stability, Geoff Bascand, said: "We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.

“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn."

He added: “We expect mortgage lenders to respect the investor restrictions immediately with all new loan approvals, to ensure that their mortgage lending is consistent with our policy decision."

So, what does this mean for buyers? Well, the first thing investors will notice in the announcement is that 5% of lending can go to those with less than 30% deposit from March 1, and less than 40 percent deposit from May 1. My advice to investors hoping to qualify is this: forget it. This is an emergency buffer for banks to cope with errors and unexpected emergency mortgages. It’s extremely unlikely a standard investor will have access to the minimal amount available. The banks are rumoured to operate at around 2-3% overrun because of the severe repercussions of exceeding the 5% line in the sand.

So, will these changes have an effect on the housing market? As discussed above, the main banks have already been enforcing a 60-70% LVR for a couple of months now, which means those with Letters of Offers from the banks at 80% LVR will be due to renew them under the new LVR policy. That means we should see the outcome of the LVR restrictions very soon if they are to work.

Finding a $400,000 deposit for a $1 million investment is a much larger undertaking than finding a $200,000 deposit, however most economists predict the news rules will have only a mild effect on the market. That being said, I think economists are overlooking the deflating enthusiasm of “borderline” investors. That is to say, those investors who thought they might like to dabble in the market (the ones who tend to overpay rather than buy-by-the-numbers) will probably now put buying an investment property in the too-hard basket, which will affect the market. This is a larger percentage of the market than you might think, and my prediction is a three-to-four-month pause for the market before the new policies become the new-norm and excitement builds again.

Unfortunately, the Reserve announcement brought no significant change for first-home buyers. This group was never given any form of LVR relief by the banks - despite the banks being able for the majority of last year to approve loans for those with less than a 20% deposit. This isn’t because the banks didn’t want the business, though. Remember that for a large portion of 2020, continued employment wasn’t a sure thing for a lot of people and lending someone 90% in that position would have been reckless.

The best-case outcome the market can hope for is a reasonable length of stagnation or a breather in market prices; no one loses equity, but the market isn’t on such a tear either. Banks will still be able to adjust their appetite for lending as we progress through 2021 and 2022 by adjusting their affordability rates and through interest rate pricing.

The old rules still apply for mortgage applicants whether they are first home buyers, movers or investors; be the best candidate you can be. Get rid of secondary, high-interest debt and demonstrate control over your expenses.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.