On the 30th April 2020 the RBNZ announced that it was removing Loan to Value Ratio (LVR) restrictions. If you've been reading the commentary that followed you'd be forgiven for thinking that this was a game changer. You’d also be thinking that a low deposit is no longer a barrier to buying your first home, or that investment property you’ve set your sights on.
Reality check!
The LVR restrictions were only one of the hurdles you had in front of you. The others still remain. The Responsible Lending Code which came into effect in June 2015 forced banks to develop internal policies which are often more restrictive than any of the external rules. These include servicing test rates, showing evidence of genuine savings and restrictions on property types.
Think about this
We’re in a volatile situation laced with uncertainty and a pending economic down-turn. Rather than a loosening of bank credit policy, we will most likely see it go the other way! This is not a risk that has been hidden from the public.
The following statement can be found in the RBNZ's 'Regulatory Impact Assessment - Removal of Loan-to-Value Restrictions following the onset of COVID-19'.
“Given the current uncertainty around the economic outlook, the Reserve Bank considers it to be unlikely that banks will weaken lending standards to high risk borrowers. The more likely risk is that banks are overly cautious with their lending to credit-worthy borrowers” [1]
The quote below sums up the main thrust behind the decision to remove LVR restrictions for 12 months.
“The decision was made to ensure LVR restrictions didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the COVID-19 pandemic.” [2]
So in summary the removal of the LVR restrictions was more about aiding the measures needed to deal with the impacts of Covid-19 on existing mortgage holders and lenders, not to stimulate mortgages for new house purchases.
There are of course developments that could come about to change this and deliver real advantages for new house purchases, this latest action could simply be the first step. Watch this space and while you wait, talk to a specialist mortgage broker who can keep you ahead of the curve.
Final thoughts
If after reading this article you feel a little deflated or ripped off, it should be noted that the LVR restrictions and the Responsible Lending Code exist for everybody's protection. The reason we will not see a housing or banking crash is partly because the measures mentioned above were put in place, and as a result have left enough room for borrowers and lenders to weather the storms of events like a GFC or a global viral pandemic. If we we're honest with ourselves, we'd thank the RBNZ for the past 5 years of LVR restrictions.
References
[2] https://www.rbnz.govt.nz/news/2020/04/reserve-bank-removes-lvr-restrictions-for-12-months