Loan to value ratios | Guide to LVR restrictions in NZ

LVR stands for loan to value ratio. It’s a measure of the size of your loan versus the value of your property.

For example, if you’ve got a $200,000 deposit (20%) and you buy a $1 million home you’d need an $800,0000 home loan. Your LVR would be 80%. 

LVR restrictions are minimum requirements for loan to value ratios, mandated by the Reserve Bank of New Zealand (these guys are New Zealand’s central bank that regulates the financial system, including banks). These LVR restrictions limit the amount you can borrow, depending on the value of the house you’re purchasing. 

LVR restrictions vary depending on a couple of factors, including:

• Whether you’re an investor or an owner-occupier.

• What type of house you’re buying. 

The Reserve Bank introduced these laws in 2013 to take a little heat out of the housing market and reduce risky, high LVR lending (to protect both banks and borrowers).

• Existing property = 20% deposit / 80% LVR
• New builds = No LVR restrictions

High LVR lending for investors: banks are allowed to do 5% of their total lending to high LVR investors. 

If you want to borrow a bit more than LVR restrictions say you can, it may be possible depending on your circumstances and what you’re trying to accomplish. Here are a list of exemptions to the rules:

The Reserve Bank allows a certain amount of high LVR lending, as we mentioned before. It’s often possible for owner occupiers to borrow outside of these limits thanks to this allowance.

First home buyers should be able to borrow up to 90% of their home value in most cases, if they have a good income and creditworthiness. This may be a little harder for existing home owners and investors to do, but it’s possible - speak to a mortgage broker who can help find a bank that's willing to lend to you. 

There are no LVRs on new builds. That means if you build a new property, or buy one from the developer within six months of completion, it’s completely up to the bank how much they’ll lend to you. Generally, banks will require that you have a deposit of at least 10% though. 

Read more about buying a new build.

To help first home buyers the Government started the ‘First home Loan’ scheme. This lets first home buyers purchase their first property with as little as a 5% deposit, via a loan underwritten by Kāinga Ora. 

Read more about the First Home Loan.

Bridging loans are when a homeowner temporarily takes out two loans when buying a home, before selling their place. These types of loans are exempt from Reserve Bank LVR restrictions. 

If you have a home that doesn’t meet the Healthy Homes requirements or isn't up to building code and you need to borrow money to fix it, the Reserve Bank LVR restrictions may not apply to you. That’s because the Reserve Bank wants to improve the housing stock of New Zealand, and is willing to allow a little extra lending to accomplish that.

If you refinance an existing loan with another bank, you won’t be subject to the Reserve Bank’s LVR restrictions, as long as you don’t try to increase the size of your loan. This exemption ensures that high LVR borrowers aren’t stuck with the bank they took their initial loan out with. 

LVRs affect property owners and everyday Kiwi in many ways. Here are a few examples:

• Tamping down house prices

The theory is that by limiting the amount that people can borrow, competition is reduced in the property market. When competition is constrained, this puts downward pressure on house prices. 

For example, let’s say Ben and Bex wanted to buy a house together, but they’ve only got a 5% deposit so they can’t yet. As a result the house they wanted to buy now only has one interested party, so it sells for less as a result. Now imagine this happening thousands of times all over the country.  

While this sounds good in theory, the fact is, house prices have continued to increase at huge rates despite LVRs. 

• Making buying a little trickier

For most people LVRs make buying a house a little trickier, particularly first home buyers. The fact is, getting a big deposit together is hugely challenging in this day and age. 

What this often means is that people have to delay their house buying plans, pay a higher interest rate, or use first home buyer assistance schemes. It may also limit the price of houses people are able to buy.

• Keeping investors in check

LVR restrictions are strictest for investors. This limits the amount of properties investors can buy, and restricts their presence in the market. If you’re planning to get into property investment, working with these LVR restrictions will be one of your key challenges.