What the current LVR limits are
LVR restrictions differ depending on whether a loan is secured by investment property or owner-occupied property.
Owner occupier loans – no more than 25% of new lending can have an LVR above 80%
This class of loan is for borrowing secured against owner occupied property. The current policy classifies owner occupier loans as high-LVR if they are more than 80% of the property’s value. The policy restricts high-LVR lending to no more than 25% of a bank’s total new owner occupier lending.
We define a property as 'owner-occupied' if the property owner, or their spouse, occupies the property as either their main or secondary residence. The definition also covers common ownership structures, such as company and trust structures.
For a secondary residence, any rental income earned from the property must be minimal (for example, a holiday house rented out for 6 weeks a year) for the property to keep its owner-occupied status.
A rental income test does not apply to a main residence, so a property will continue to be considered owner-occupied if the owner who lives in the residence takes in a boarder or flatmate.
Investor loans – no more than 10% of new lending can have an LVR above 70%
LVR restrictions are tighter for investor loans as there are higher risks with this type of loan. The current policy classifies investor loans as high-LVR if they are more than 70% of the property’s value. The policy restricts high-LVR lending to no more than 10% of a bank’s total new investor lending.
LVR limits only apply to new loans
LVR restrictions only apply to new lending and do not apply retrospectively to existing loans.
A change to LVR settings will only affect existing borrowers who take out a ‘top-up’ loan that takes the total LVR above the required threshold.
Banks will still apply their own lending criteria to individual borrowers and may choose not to provide finance in certain circumstances or to provide it only at lower LVRs.
LVR exemptions and special cases
There are some exemptions to LVR rules. The LVR restrictions don't apply to:
- Kāinga Ora loans, including First Home Loans.
- Refinancing a mortgage, where the new loan value doesn’t exceed the original loan value.
- Portability - this applies when the borrower shifts a loan from one property to another (provided the total loan value does not increase).
- Bridging finance.
- Property remediation (for example fixing a leaky home).
- Construction loans – this applies when the borrower is constructing a new home or is purchasing a newly built home from the developer within 6 months of completion.
In addition, borrowers with owner occupied and investment property collateral can use the combined collateral exemption to obtain finance up to 70% of the value of the investment properties and 80% of the value of their owner-occupied property.
A full list of exemptions is set out in the Framework for restrictions on high-LVR residential mortgage lending (PDF, 330KB)
Why we introduced LVR restrictions
We introduced LVR restrictions in October 2013 in response to rapid house price growth, especially in Auckland, accompanied by a sharp increase in the amount of low-deposit loans. Over time, the LVR policy has made households more resilient and reduced risks to banks.
We have adjusted LVR settings somewhat regularly since they were introduced. These adjustments have been in response to changes in housing-related risks, recognising that tighter settings have the greatest benefit when risks are high.
How we impose LVR restrictions
Restrictions on high-LVR residential mortgage lending set a ‘speed limit’ on the amount of low-deposit lending banks can provide. The speed limits cap the share of new lending that can go to borrowers with high LVRs over a given period (a three-month or six-month lending period, depending on the size of the bank).
If a bank’s high-LVR residential mortgage lending exceeds the speed limit, it will be in breach of its conditions of registration. We would need to consider the reasons for the breach and we may impose a range of sanctions.
For more information about breaches, see our approaches to supervision and enforcement.
Why we impose LVR restrictions
LVR restrictions support the stability of the housing market and reduce the risk of a sharp correction in house prices. They limit the number of highly indebted borrowers who might struggle if a housing downturn were to occur.
Housing, like other asset markets, can be subject to ‘fire sale’ effects in a downturn, where indebted borrowers sell property to pay down debt, which in turn depresses prices and creates further incentives to sell and/or reduce spending and borrowing.
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. Property is also a significant part of many New Zealanders' investment portfolios.
A sharp correction in house prices is therefore a significant risk to the financial system, which could negatively disrupt the banking system and cause lasting damage to households and the wider economy.
