Loan-to-value ratio restrictions FAQs
A loan-to-value ratio (LVR) is a measure of how much a bank lends against mortgaged property, compared to the value of that property. Borrowers with LVRs of more than 80 percent (less than 20 percent deposit) are often stretching their financial resources. They are more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates. When we talk about high-LVR (low-deposit) lending, we are generally referring to someone with less than a 20 percent deposit – or an LVR ratio of greater than 80 percent. For investors purchasing property in Auckland secured with a mortgage, deposits of less than 30 percent (LVR of greater than 70 percent) are considered high-LVR.
These restrictions provide a buffer in the face of a sharp housing downturn, which would particularly affect highly-indebted home owners and investors.
LVR restrictions are one of four macro-prudential tools the Reserve Bank can use to help reduce risks to the financial system during boom-bust financial cycles. These risks can be due to rapid credit and asset price growth, rising household debt and leverage, or excessive liquidity.
For more information on macro-prudential tools, see macro-prudential policy – FAQs
This short video – Booms, busts and the way between – explains macro-prudential policy and the tools the Reserve Bank has to smooth out boom-bust cycles.
The Reserve Bank introduced LVRs in October 2013 as a single, nation-wide lending restriction – banks were permitted to make no more than 10 percent of their total residential mortgage lending to borrowers with less than 20 percent deposit (LVRs of over 80 percent).
On 1 November 2015 the Reserve Bank changed its LVR policy. LVR lending restrictions have eased for all of New Zealand except in Auckland. They are now tighter for those purchasing residential investment properties in Auckland in response to the growing housing market risks in the region. Banks’mortgage lending is now placed into one of three classifications of LVR restriction – Auckland Property Investor loan (APIL), Other Auckland lending (ANPIL), and Non-Auckland loan. See the LVR factsheet (PDF 127 KB) for full details of these loan types and restrictions attached to them.
The Reserve Bank introduced LVRs in October 2013 in response to rapid house price growth, especially in Auckland, accompanied by a sharp increase in the use of low-deposit loans. The policy had an immediate dampening effect on housing market activity and house price inflation, and helped to strengthen bank balance sheets.
However, from late 2014, upward pressure on the housing market re-emerged, predominantly in Auckland, posing renewed risks to financial stability. A particular feature was strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit. This Analytical Note, published in October 2015, takes an in-depth look at housing market trends since LVRs were introduced.
Housing lending makes up about half of bank lending in New Zealand, and a home is usually the single largest asset that a family owns. There has also been a rising incidence of small investors (those that are heavily reliant on credit) in the housing market. These factors mean that any instability in the housing market could undermine the stability of the wider banking system and economy.
The Reserve Bank does not believe that LVRs are a fix for the Auckland house price problem, which largely reflects rapid growth in the population and a shortage of new housing. Increasing the supply of housing is ultimately what is needed. What LVRs can do is help to build resilience of the financial system by reducing the number of low-deposit loans on the banks’ balance sheets. Since LVRs reduce the amount people can borrow, they can help to dampen the housing market and thereby reduce the risks associated with a future housing downturn.
Following the introduction of initial LVR restrictions, Reserve Bank Governor Graeme Wheeler published an opinion article: Why Loan-to-Value Ratios were introduced in October 2013. Prior to the introduction of the revised restrictions, Deputy Governor Grant Spencer gave a speech: Investors adding to Auckland Housing Market risk in August 2015.
LVR restrictions apply to new low-deposit (high-LVR) loans, and not retrospectively to existing loans.
The new restrictions will only affect you if you want to take out a‘top-up’ loan that takes your total LVR above the required threshold. Refer to the LVR factsheet (PDF 127 KB) for further details.
The Reserve Bank introduced LVR restrictions on 1 October 2013, and made further changes to the LVR policy on 1 November 2015.
For more information on the LVR consultation history, together with news and updates on the changes to the LVR restrictions (including exemptions).
The restrictions took effect from 1 November 2015.
Banks need to comply with the ‘speed limit’ over a six-month window, beginning 1 November 2015. After the first six-month window, the larger banks (those with housing lending of more than $100 million) must comply using three-month rolling windows.
This approach means that banks can run over the respective speed limits in some individual months, for example, if they have some loan pre-approvals they need to honour. If so, they will need to run below the speed limits in other months within the window to ensure they meet the ‘speed limit’ for the window as a whole.