When you are on the hunt for a new home, whether it is your first home, moving up or down the ladder, or an investment – one of the key things to understand is your Loan-to-Value Ratio (LVR). Lenders, regardless of whether they are a bank or non-bank, place a large emphasis on your LVR when assessing your loan application.
So, what is LVR? Why does it matter? And how does it affect your ability to successfully receive a loan? Let’s break it down.
What is LVR and how is calculated?
Your Loan to Value ratio, or LVR, is the percentage of your loan amount compared to the value to the property you’re buying.
For example, if you’re buying a home worth $500,000 and you have a $100,000 deposit, you’ll need to borrow $400,000. This means your LVR is 80% – because you’re borrowing 80% of the property’s value.
Generally, LVRs are talked about in two different ways:
- High-LVR: Which is considered a loan that is secured with a small deposit.
- Low-LVR: Which is when the loan is secured with a higher deposit.
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 10%, however, some may allow a 5% deposit if you meet certain criteria. If you’re purchasing an investment property, lenders are not able to approve your loan if you do not provide a deposit (or equity) of 30% or more.
An LVR over 80% is currently considered high-LVR unless you qualify under the Kainga Ora First Home Loan Criteria.
How is my LVR calculated?
Your LVR is calculated by taking your loan amount (your mortgage) and dividing it by the lender’s valuation of the property or properties you own.
For example, 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 $150,000 will be required.
Are there LVR restrictions?
Yes – the Reserve Bank of New Zealand has implemented certain restrictions on the amount of high-LVR loans lenders are able to provide e.g -20% of their volume.
There are however certain exemptions to those restrictions, such as:
- New builds
- Kainga Ora First Home Loans.Â
We’ll guide you through the current rules and let you know if your situation qualifies for an exemption.
Small deposit, does this matter?
As mentioned above, for first-time buyers, some lenders allow for deposits as low as 5%. However, this is definitely the upper limit of a high-LVR.
With the current restrictions on the amount of high-LVR loans lenders are able to grant, these applications are assessed more carefully – and that’s where we come in. We work with multiple lenders and know where there may be flexibility, so we can advocate for you and your application.
You already have a mortgage, how does this apply?
The LVR restrictions don’t apply retrospectively – if you already have a mortgage, you’re not affected unless you’re applying for a top up (eg – for renovations or other lending needs). In that case, we’ll assess your updated LVR and help you decide how best to structure the new borrowing. We’ll also let you know if your top up crosses into high LVR territory and what your options are.
Why LVR matters over time
Your LVR isn’t fixed. As you pay down your mortgage or your property’s value increases, your LVR improves – opening up opportunities:
- Better interest rates
- Easier access to refinancing
- Potential to purchase another property
Keeping track of your LVR is a smart move for anyone looking to grow their wealth through property. We’ll help you monitor it and make informed decisions as your position changes.
Need help understanding your LVR?
Whether you’re buying your first home, planning to invest, or considering a refinance, we’re here to help. We’ll calculate your current LVR, explain what it means for your borrowing options, and handle all the communication with lenders on your behalf.
