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 secured with a mortgage, deposits of less than 40 percent (LVR of greater than 60 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.

‘Speed limit’ is a term that we use in relation to the banks, and the restrictions on the amount of low deposit (high-LVR) lending that the banks can make. There are two high-LVR nationwide speed limits: 20 percent for owner-occupied lending and 5 percent for investor lending.  See ‘What are the current LVR restrictions?’ below and the LVR factsheet: A guide for borrowers (PDF 141 KB).

 

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.

From 1 March 2021:

• LVR restrictions for owner-occupiers will be reinstated to a maximum of 20% of new lending at LVRs above 80%.
• LVR restrictions for investors will be reinstated to a maximum of 5% of new lending at LVRs above 70%.

From 1 May 2021:

• LVR restrictions for owner-occupiers will remain at a maximum of 20% of new lending at LVRs above 80%.
• LVR restrictions for investors will be further raised to a maximum of 5% of new lending at LVRs above 60%.

A property will be an owner-occupied property if the person who owns the property, or their spouse, occupies the property as either their principal 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 (e.g. a holiday house rented out for six weeks a year) for the property to retain its owner-occupied status. No rental income test applies to a principal 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.

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 helped to strengthen bank balance sheets and had an immediate dampening effect on housing market activity and house price inflation. From late 2014, upward pressure on housing prices re-emerged, predominantly in Auckland, posing renewed risks to financial stability. Investor lending had been increasing rapidly and was a significant contributing factor to the renewed housing market strength.

A sharp correction in house prices is a key risk to the financial system. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy. 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 (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.

LVR restrictions were removed in April 2020 to ensure they didn’t interfere with COVID-19 policy responses aimed at promoting cash flow and confidence. Since then, in part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace. 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.

Restrictions on low-deposit (high-LVR) residential mortgage lending act as a ‘speed limit’ on how much low-deposit lending banks can do. This restriction operates by setting an upper limit on the share of low-deposit housing lending that can be provided by each bank over a given time period (a 3-month or 6-month lending period, depending on bank size).

Yes, under specific circumstances there are exemptions to LVR restrictions. Where a loan falls under an exemption, the loan is not included in the banks’ high LVR ‘speed limits’. Exemptions related to construction, remediation, loan portability, bridging finance, refinancing, Housing New Zealand loans, Kiwibuild, and combined collateral are detailed in the LVR factsheet: A guide for borrowers (PDF 141 KB). Details about the exemption for new home construction are in the Construction exemption Q&As (PDF 101KB).

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.

The Reserve Bank considers that repaying part of a mortgage (selling one or more of a pool of securities) need not constitute a new commitment as defined by the Reserve Bank. However, more generally, how the proceeds are split between borrower and bank when a property is sold will depend on the mortgage contract and the policies of the bank.

The Reserve Bank introduced LVR restrictions on 1 October 2013, and made further changes to the LVR policy on 1 November 2015, 1 October 2016, 1 January 2018, 1 January 2019 and 1 March 2021.

For more information on the LVR consultation history, together with news and updates on the changes to the LVR restrictions (including exemptions), please refer to the Loan-to-valuation ratio restrictions page.

No. Banks are still able to do some lending to borrowers with low deposits. However, they must operate within their individual high-LVR ‘speed limits’ by borrower type. These high-LVR ‘speed limits’ are 20 percent for owner-occupied lending and 5 percent for investor lending.

LVR restrictions 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.

LVR restrictions are temporary. 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 will be lifted once the Reserve Bank judges that the risks that the housing market poses to financial stability have lessened sufficiently.

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.