Sam Shuttleworth: LVR speed limits designed to curb inflation and shield economy

The Reserve Bank of New Zealand changes will have an impact on all home buyers. Photo / Janna Dixon

Opinion

The struggle to enter the property market for the first time has been a hot topic, from property availability to lending criteria.

The Reserve Bank of New Zealand (Reserve Bank) will introduce a change which will have an impact on all home buyers, including first time home buyers, through the introduction of a loan-to-value ratio (LVR) restriction from October 1, 2013. What does it mean?

A loan-to-value ratio measures how much a bank lends against residential property, compared to the value of that property.

Let's look at two examples to better understand how it works: if you purchase a house for $500,000, and borrow $400,000 from a bank, your LVR ratio would be 80 per cent (400,000 divided by 500,000). And, if you borrow a lower sum - say $380,000 - to purchase the $500,000 house, your LVR would then be 76 per cent.

From October 1, 2013, the Reserve Bank will implement LVR restrictions on residential mortgages, or as the Reserve Bank calls them 'LVR speed limits'. What does this mean?

These LVR speed limits basically limit the amount of residential mortgage or home lending a bank can do - new lending on property purchases with a LVR greater than 80 per cent is limited to no more than 10 per cent of the dollar value of the bank's new residential mortgage lending.

Therefore it's not an entire prohibition of lending on residential properties with a LVR of 80 per cent or higher, but a restriction. In essence, the tap has been turned down but not off.

Exceptions include Housing New Zealand's Welcome Home Loans, bridging loans (where you have brought a new house and you still haven't sold your existing property and require "bridging finance" to cover the gap), refinancing of an existing loan and existing home loans - apart from existing home owners deciding to 'top-up' their loan; then this will need to be included within the bank's LVR speed limit.

So why has this been brought in? The LVR speed limit is designed to help dampen house price inflation, which has been an area of strong debate for the Auckland and Christchurch regions.

One of the Reserve Bank's roles is to promote a sound and efficient financial system and avoiding significant damage to the system that could result from the failure of a bank. As a result, the Reserve Bank is strongly focused on ensuring financial stability and the potential risks an overheated housing market could bring. Therefore, the Reserve Bank has kept a very close eye on what has been happening in the property market given the potential impact this could have on the wider New Zealand economy as a whole.

First time home buyers are naturally nervous, the market is tight and it seems hard to get on the property ladder. If you are in this camp, or if you are an existing home buyer looking to make the next step up, you should check with your bank to understand what this means for you.

Of course, no one can predict how the property market will go; there are additional factors than financial criteria to consider for Kiwis wanting to achieve their dream of a home with a white picket fence. House availability, buyer demand, and buyer expectations from location to number of rooms and bathrooms are others.

Sam Shuttleworth is a partner at PwC and a banking sector leader.