In the wake of the recent implementation of LVR (loan to value ratio) policies, the Reserve Bank has come under a lot of pressure- most of it from financial commentators, or new homeowners affected by the policies. This was fairly expected, however what has been surprising is the (relative) lack of public discourse and protest.
The reason for this? The Reserve Banks poor communication ability, as was addressed by its Deputy Governor Geoff Bascand on Friday. Bascand stated; “A recent foray into the ‘public audience’ via an opinion article explaining the LVR policy… appeared to reveal substantial public surprise about our interest rate projections” and that they “re working to enhance the openness and effectiveness of our communications”. Regardless, understanding the basics of the LVR policies is essential, so we thought we’d take a crack at it, and here it is-
The beginners guide to LVR basics
What are these LVR limits, or LVR polices as they’re also called?
LVR stands for loan to value ratio- essentially the proportion of the properties value that is being mortgaged. Previously, banks have been allowing customers to take out loans with high LVR’s- i.e. loans that amount to up to 90% of the properties value! The reserve bank is attempting to control the frequency at which this happens through these policies, which limit major banks from giving high LVR loans (worth more than 80% of the properties value) to more than 15% of their customers.
Why are they necessary?
NZ’s housing market is currently highly overinflated, driving prices up and up- and Kiwi’s debt in the process. The Reserve Bank is trying to prevent this, as unsustainable debt was a major driver in the last economic recession.
Who do they affect?
Anyone looking to take out a loan is included under these policies, however if you already have the 20% deposit, the effect will be minimal. In fact, you will likely get a better deal, as you are a ‘desired’ customer!
What if I don’t have the deposit?
If you don’t have the 20%, you will need to try to fall in the 15% that can take out a high LVR mortgage. If this option isn’t viable, then you can look elsewhere, in particular applying for a ‘Welcome Home’ loan from the government (available to low income households), a second tier mortgage, or someone (often a family member) who is willing to underwrite your mortgage.
Where do they apply?
They apply to major banks in New Zealand- not just the areas experiencing massive property price inflation.
How should I go about getting a mortgage now?
If you are seriously considering getting a mortgage, seeing an experienced mortgage broker is a must. Not only do they know who has the best deals available, but their years of experience mean they can give you expert an unbiased advise- which you aren’t going to receive anywhere else!
As you can see, the basics of the policies aren’t too complicated, and are something that every potential mortgagee should understand. Unfortunately, they do make the whole mortgage process much more arduous. Regardless, expert individual advice is incredibly important to making decisions of this magnitude, so come see a mortgage broker for an appointment – it could save you thousands of dollars and hours of your time!
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