When you are on the hunt for a new home, whether it is your first or another in the portfolio, one of the most important factors you need to consider is your LVR. Lenders, regardless of whether they are a bank or another lending institutions, place a large emphasis on your LVR value when assessing your loan application.
Below we answer some common questions about this value, in the hope of helping you better understand how it may impact your ability to successfully receive a loan.
What is an LVR?
A Loan to Value ratio, or LVR, is the value that lenders give to the relationship between your loan, or mortgage, compared against the value of your property.
Generally, LVRs are talked about in two different ways. Firstly, high-LVR lending, which is considered a loan that was secured with a small deposit. Secondly, a low-LVR which is when the loan was secured with a higher deposit then the minimum.
The threshold between what determines a high or low-LVR depends on whether you are a first-time buyer or not. If you are a first-time buyer, most lenders will require a deposit of at least 20%, however, some may allow a 10% deposit if you meet certain criteria. If you’re purchasing an investment property, lenders are not able to approve your loan if you don’t provide a deposit of 35% or more.
Which means, for first-time buyers an LVR of over 80% is currently considered a high-LVR and for investors, a 65% LVR is currently considered up there as well.
How is my LVR calculated?
Your LVR is calculated by taking your loan amount (your mortgage) and dividing it by the lender’s evaluation of the property or properties you own.
For example, for first-time buyers, if your property is worth $500,000 to meet an 80% LVR, you will need to have a deposit of at least $100,000. Whereas if you are buying an investment property, for the same price, a deposit of $175,000 will be required.
Even then, with these deposits, you will still have a high-LVR value as your deposits will only put you at the upper-limits of what most lenders are allowed to approve.
Are there any restrictions?
Currently, the Reserve Bank of New Zealand has implemented certain restrictions on the amount of high-LVR loans lenders are able to handout. However, these restrictions are like guidelines and are not absolute, which allows lenders to continue providing low deposit loans.
Referred to as ‘speed limits’, they may vary between first-time buyers and investors. Lenders are not permitted to allocate more than 15% of their residential owner-occupied loans to high-LVRs candidates.
Small deposit, does this matter?
As mentioned above, for first-time buyers, some lenders allow for deposits as low as 10%. However, this is definitely at the upper limit of a high-LVR.
With the current restrictions on the amount of high-LVR loans lenders are able to grant, your ability to secure a loan with a small deposit is entirely dependant on your lender’ other mortgage commitments. Additionally, most lenders will have internal guidelines around how many high-LVR deposits they are willing to commit to.
If you’re looking at trying to secure a high-LVR loan, it is important you speak to multiple lenders to see what their current leeway is and if they are able to move forward with your application. If they are capable, in most situations, they will complete a fairly thorough assessment of your situation to determine whether you are an adequate candidate.
You already have a mortgage, how does this apply?
The LVR restrictions only apply to new low-deposit loans and not retrospectively to outstanding loans.
If you already have a mortgage, you will only be affected by these restrictions if you are looking to ‘top up’ your loan. If this top up takes your loan above the required threshold, your bank will need to decide whether to use some of their ‘speed limit’ capacity. So if you are looking to extend your mortgage to pay for a renovation, a holiday or an unforeseen expense, make sure you speak to your lender well in advance.
As you progress through your journey down the property journey, your LVR will, in large part, determine what you can and can’t do. As you start working through your repayments, this value will start to decrease, which will allow you options to play with, such as buying a second home or improving your current one.
It is important you understand exactly what is required from you and where you stand in term of your LVR. So make sure you are constantly staying on top of it and evaluating your position. If you are uncertain about anything to do with your LVR or mortgage in general, makes sure you speak to your lender or get in touch with us. We will be able to give you the advance and guidance you need to ensure you are not under any unnecessary strain or help you reach your property dreams.
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