Loan-to-value ratio restrictions
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. Limits on high LVR residential mortgage lending have been in place since October 2013.
LVR restrictions have been revised over time and were removed in response to the economic impact of the COVID-19 pandemic in 2020 and later reinstated at 1 March 2021 at the same level as prior to the onset of COVID-19. A further tightening of investors’ restrictions took effect on 1 May 2021, and a further tightening of restrictions on lending to owner-occupiers took effect on 1 November 2021.
What the current LVR limits are
LVR lending restrictions differ depending on whether a loan is secured by residential investment property or owner-occupied residential property. The previous limits that applied to bank lending to investors and owner-occupiers are shown below.
Investor loans – 40% deposit / 5% limit for high LVR loans
LVR lending restrictions are tighter for investor loans due to the higher risks associated with this type of loan. The current policy classifies investor loans as high-LVR if they are more than 60% of the property’s value, and restricts high-LVR lending to no more than 5% of a bank’s total new investor lending.
Owner occupier loans – 20% deposit / 10% limit for high LVR loans
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, and restricts high-LVR lending to no more than 10% of a bank’s total new owner-occupier lending.
Definition of owner-occupied property
We define a property as owner-occupied if the person who owns the property, 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 six weeks a year) for the property to keep its owner-occupied status.
No rental income test applies 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.
Why we impose LVR restrictions
LVR restrictions support the stability of the housing market and help reduce the risk of a sharp correction in house prices. They also provide an additional buffer if a housing downturn were to occur, which would particularly affect highly indebted home owners and investors.
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 impact the functioning of the banking system and cause lasting damage to households and the wider economy.
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.
Limits only apply to new loans
LVR restrictions only apply to new loans. They do not apply retrospectively to existing loans.
The restrictions 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 to not provide finance in certain circumstances or to provide it only at lower LVRs.
Exemptions and special cases
There are some exemptions relating to borrowing to build a new home, for non-routine repair work (e.g. fixing leaky homes) on existing properties, bridging finance, refinancing of existing loans, shifting loans from one property to another (provided the total value of the loan does not increase) and loans made under the Kāinga Ora Mortgage insurance scheme (including First Home Loans). Loans to people building a new residence are exempt. The borrower must either commit to the purchase at an early stage of construction, or be buying the residence (within six months of completion) from the developer. The exemption applies for both owner-occupiers and residential property investors. The LVR rules do not prescribe the size of a deposit for new residences. The construction exemption also covers any loan for a residential property purchase under the government’s Kiwibuild programme. 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% on their owner occupied property.
More information about the exemption framework is provided in BS19 of the Banking Supervision Handbook, 'Framework for restrictions on high-LVR residential mortgage lending'.
Why we first introduced LVRs
We first 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.
We removed LVR restrictions in April 2020 to ensure they did not interfere with COVID-19 policy responses aimed at promoting cash flow and confidence, including the mortgage deferral scheme. At that time, the outlook for the housing market was weak and prices were expected to fall. However, since the third quarter of 2020, prices began to rise rapidly with levels of high-LVR lending, particularly to investors.
We reinstated the restrictions from 1 March 2021 due to our concern about the increasing risk of a sharp correction in the housing market.
How LVR restrictions are imposed
Restrictions on high-LVR residential mortgage lending set a ‘speed limit’ on how much low-deposit lending banks can do. The speed limits operate by setting a cap on the share of high-LVR lending that can be provided by each bank over a given time period (a three-month or six-month lending period, depending on bank size).
As set out above, the speed limits at present are 10% of lending at high-LVRs for owner-occupied property and 5% for investor property.
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, refer to our statements of supervisory and enforcement approaches.
Older LVR information and media releases
See the timeline for LVR for a list of consultations and documents relating to consultation.