A loan-to-value ratio (LVR) is a measure of how much a bank lends against residential property, compared to the value of that property. For example, borrowers with LVRs of more than 80 percent have borrowed more than 80 percent of the value of the property (less than 20 percent deposit).
Loans with LVRs of more than 80 percent are considered to be ‘high-LVR’ loans. LVR restrictions or ‘LVR speed limits’ restrict the amount of high-LVR lending a bank can do (see “how are LVR restrictions imposed?” below). These restrictions reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly-indebted home owners.
For more information on the framework for LVR restrictions, and the RBNZ’s early experience in operating them, refer to An A to Z of loan-to value ratio restrictions (PDF 392 KB)
LVR restrictions are one of four macro-prudential tools the Reserve Bank can use to help reduce risks that can develop in 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 believes that the housing market poses a risk to financial stability in New Zealand. 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. These factors mean that any instability in the housing market could undermine the stability of the wider banking system and economy.
In October 2013, Reserve Bank Governor Graeme Wheeler published an opinion article: Why Loan-to-Value Ratios were introduced.
The Reserve Bank actively monitors developments in the housing market and is committed to taking action when necessary.
This restriction operates by setting an upper limit on the share of high-LVR housing lending that can be provided by each bank over a given time period (a 3 or 6 month lending period, depending on bank size). Banks are required to restrict new residential mortgage lending at LVRs of over 80 percent (deposit of less than 20 percent) to no more than 10 percent of the dollar value of their new residential mortgage lending.
As such, this restriction allows banks to continue some high-LVR lending to some borrowers.
LVR restrictions apply to new high-LVR loans, and not retrospectively to existing loans.
Existing borrowers will only be affected if they want to take out a ‘top up’ loan which would take the total loan to value ratio above 80 percent.
Banks are able to claim exemptions to the restrictions on some forms of housing lending including re-financing, bridging, construction and Welcome Home Loans.
The restrictions took effect on 1 October 2013.
For more information on the LVR consultation history, together with news and updates on changes to LVR restrictions (including exemptions) refer to the loan-to-value ratio restrictions page of the RBNZ website.
No. Banks are still able to do some lending to borrowers with low deposits. However, they must operate within the speed limit, keeping high-LVR lending to no more than 10 percent of new residential mortgage lending.
Yes. There is an exemption for lending that is financing the construction of a new house or apartment. The exemption means that high-LVR lending for this purpose will fall outside the 10 percent speed limit. For more information read the questions and answers about the construction exemption.
The LVR restrictions will support the stability of the housing market and help reduce the risk of a disorderly correction in house prices. Although the availability of high-LVR loans will be reduced, the speed-limit approach means some borrowers should still be able to obtain high-LVR loans. A large proportion of borrowers in the housing market are not reliant on high-LVR lending.
The Reserve Bank actively monitors developments in the housing market, financial system and the economy, and is committed to taking action when necessary to support the long-term stability of the financial system. LVR restrictions are temporary measures, and will be lifted once the risks the housing market poses to financial stability lessen.
The restrictions took effect on 1 October 2013. Initially, banks needed to comply with the speed limit over a six month window, beginning on 1 October 2013.
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 10 percent speed limit 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 limit in other months within the window to ensure that they meet the 10 percent speed limit for the window as a whole.
If a bank’s high-LVR residential mortgage lending exceeds the speed limit it will be in breach of its conditions of registration. The Reserve Bank would need to consider the reasons for the breach and may impose a range of sanctions. For more information about breaches, refer to the Statement of Supervisory Approach and the Statement of Enforcement Approach.