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 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.

‘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.

There are two nationwide speed limits for owner occupier and investor lending. Banks are permitted to make no more than 20 percent of their residential mortgage lending to high-LVR (less than 20 percent deposit) borrowers who are owner occupiers, and no more than 5 percent of residential mortgage lending to high-LVR (less than 30 percent deposit) borrowers who are investors.

 

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.

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 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.

Prior to the introduction of the 2016 LVR restriction revisions, Deputy Governor Grant Spencer gave a speech: Housing risks require a broad policy response in July 2016.

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 and 1 January 2019.

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.

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.

They 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.

The latest changes to LVR restrictions took effect from 1 January 2019.

Large banks (those with monthly lending of more than $100m) need to comply with the new ‘speed limit’ over a three-month rolling window, beginning 1 January 2019. Smaller banks must comply with LVR speed limits over a six-month rolling window starting on the same date.

This approach means that banks can run over their respective speed limits in some individual months, for example, if they have some loan pre-approvals they need to honour. If they do exceed the limit in one month then 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.

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.