17 June 2019
An Investor's Guide: Loan to Value Ratios
Are you looking to begin your investment portfolio, but don’t know where to start? Knowing your loan-to-value ratio (LVR) is the first all-important step towards property investment. To help you make the leap, and bridge the knowledge gap, it’s essential to understand the role it plays in investing, so you don’t over-extend yourself and your purchasing power.
It’s all about ratios – loan ratios
Back in October 2013, the Reserve Bank implemented a temporary limitation on LVR residential mortgage lending, as a preventative measure towards those over-extending their investment borrowing at the tail-end of 2008’s global financial crisis.
Put simply, the LVR is a measure of the how much a bank lends against a residential property, compared to the value of that property. For example, if you’re wanting to buy a house as an investment property, the LVR is the total lending debt across your portfolio. Currently, the lending restrictions are set at a borrowing limit of 70%, meaning you’re required to have the remaining 30% as a monetary deposit or in equity.
Over time, the restrictions have been revised and, in November 2018, the Reserve Bank eased the LVR restrictions, meaning banks now have more discretion on the imposed ‘speed limits’.
What are speed limits?
In this instance, speed limits are not for the road. The end goal of a speed limit is to not over-stretch buyers and their financial resources.
They refer to the restriction placed on banks, set by the Reserve Bank, to inhibit how much – and how often – they can offer high LVRs (aka low deposits). There are currently two speed limits within New Zealand – one for owner occupiers and one for investor loans.
The investor loan speed limit restricts bank lending to no more than five percent of its total new investor lending. In this regard, investor loans are considered to have a high LVR if they are more than 70% of the property’s value.
How is my loan-to-value ratio calculated?
To calculate your LVR, take your loan value (amount you’ve borrowed) and divide it by the valuation of the property supplied to the bank, for example, a property worth $400,000 that you’re purchasing using a cash deposit, and a loan secured from a mortgage. For investors, a deposit of anything less than $120,000 would be a high-LVR loan, as this would result in an LVR above 70%.
Why are there restrictions?
The LVR restrictions provide a buffer in the face of a sharp housing downturn, which would affect highly indebted homeowners and investors. They may be more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates. The loan-to-value ratios are in place to protect both the buyers and the economy.
Want more info?
If you’re looking at investing in property, your first port of call is your bank to discuss your LVR. Your second port of call is to us – we’ll help you find the best investment property for your needs.