Why the Reserve Bank scrapping LVR rules won’t change anything for borrowers

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The Reserve bank recently announced that they were completely scrapping loan to value ratio (LVR) restrictions for both home buyers and investors for the next 12 months.

This is a huge announcement but what does it actually mean? And will it really make it easier to secure a home loan? 

Loan to value ratio restrictions explained

The Reserve Bank of New Zealand (RBNZ) sets LVR restrictions to limit the amount of lending banks do to investors with less than a 30% deposit and home buyers with less than 20%. The idea is that if the banks limit their exposure to these lower LVR, higher risk borrowers, they’ll be in a stronger financial position if anything were to change and borrowers started defaulting (missing loan repayments).

By removing these restrictions, the Reserve Bank hopes to make it easier for home buyers and investors to purchase property with a smaller deposit. If it were to work as intended, this change could stimulate buyer interest and provide a shot in the arm for the property market.

Why the change won’t change much

The Reserve Bank’s removal of LVR restrictions might not be the massive change that most people are expecting. The fact is each retail bank has their own lending criteria and credit profiling processes that they use to assess lenders on a case-by-case basis. We’re in the midst of uncertain economic times so they’re being particularly careful right now. 

Despite LVR changes, banks will still look into each customers creditworthiness, including:

  • Level of debt. 
  • Income.
  • Spending habits and the cost of living. 

Due to the havoc, COVID-19 has been wreaking on employment in New Zealand, banks will also look closely at each applicant’s job security, and the outlook for the industry they work in. If they decide you may not be able to service your loan, banks are still just as likely to deny your application as they were before. We’ve even seen a few applications denied based purely on the fact that applicants were working in badly affected industries like hospitality and tourism.

What does this mean for you?

Banks in New Zealand have allowed thousands of customers to take mortgage holidays which will affect their cash flow. When these are over and we’ve got more certainty around what a post-COVID-19 NZ looks like in six months,  we may see banks loosening the purse strings in line with the scrapping of LVR rules. 

But for now, securing a home loan with a low deposit may not be significantly easier than it was before the LVR rules changed. If you need a hand preparing your home loan application to make sure it gets over the line, give us a call and our expert advisors will help you with every stage of the process (for free).

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