LVR picThe Reserve Bank’s loan-to-value-ratio (LVR) rules first took effect on 1 October 2013, and changes to these rules took effect on 1 November 2015.

What change is the Reserve Bank making to the LVR rules?

The LVR restricts the amount of high-LVR lending a bank can do in a given time period.

Banks are required to restrict new residential mortgage lending for LVRs of over 80% (deposit less than 20%) to no more than 10% of the dollar value of their new residential mortgage lending book.

The purpose of the rules is to help reduce risks that can develop in the financial system during boom-bust financial cycles. The LVR rules are intended to support stability of the housing market and help reduce the risk of disorderly correction in house prices.

According to the Reserve Bank, the LVR is to be increased for Auckland due to the Auckland median house price being more than 60% above its 2008 level and the rapid rise of Auckland house prices.

House prices in the Auckland region have become very stretched, increasing the risk of financial instability from a sharp correction in prices.

The restriction for LVR borrowing outside of Auckland will be eased by increasing the dollar value of the new residential mortgage lending book from 10% to 15%. This reflects the more subdued housing market outside of Auckland.

What are the new LVR restrictions on Auckland housing?

The Reserve Bank has announced that a new LVR policy will apply to the Auckland housing market._1DC1180

Residential property investors in the Auckland Council region, using bank finance, will be required to have at least a 30% deposit. Furthermore the banks’ high-LVR lending range for Auckland will remain at 10% of the dollar value of their new residential mortgage lending book.

Some banks are already voluntarily applying these new rules before they become mandatory.

First home buyers will still be able to get bank mortgage funding with only a 20% deposit.

Jim Martin is Head of Tax at UHY Haines Norton. If you have any questions or would like to discuss any aspects of this article, please contact Jim on (09) 839-0241 or email jmartin@uhyhn.co.nz.