Stepping into the property market for the first time can be both exhilarating and daunting. One term you're likely to encounter early in your property journey is the Loan-to-Value Ratio (LVR). While it might seem complicated at first glance, understanding LVRs can significantly ease your passage into home ownership. This article aims to guide first-home buyers through the intricacies of navigating LVR limits in the New Zealand property market.
What is LVR?
Loan-to-Value Ratio, or LVR, is a crucial term in mortgage lending. It represents the percentage of a property’s value that is financed with a mortgage. To calculate the LVR, you divide the loan amount by the property value and multiply by 100:
\[ \text{LVR} = \left( \frac{\text{Loan Amount}}{\text{Property Value}} \right) \times 100 \]
For example, if you're buying a $800,000 property and you have a $160,000 deposit (20%), you would need a $640,000 mortgage. The LVR would therefore be 80%:
\[ \text{LVR} = \left( \frac{640,000}{800,000} \right) \times 100 = 80% \]
For the same property but with a $100,000 deposit, the LVR would be:
\[ \text{LVR} = \left( \frac{700,000}{800,000} \right) \times 100 = 87.5% \]
LVR is a key consideration for mortgage lenders, as it helps them assess the risk associated with your loan. Understanding how LVR works can also help you set savings goals and make informed decisions when looking for a property.
The Reserve Bank’s LVR Guidelines
The Reserve Bank of New Zealand (RBNZ) sets LVR restrictions to maintain stability in the housing market and mitigate risks tied to high-LVR lending. For first-home buyers, the primary concern is that the bulk of Owner-occupier loans require a 20% deposit. (The RBNZ sets a "speed" limit to allow banks to lend out some high LVR loans, which as of June 2023 the speed limit is 15% for owner occupier loans). This means that the majority of new mortgage lending for owner-occupied homes should have an LVR of 80% or lower.
These guidelines can change based on economic conditions and market stability. However, keeping abreast of RBNZ guidelines will give you a clear sense of how much you'll likely need for a deposit and what kind of mortgage you can realistically afford.
Practical Advice for First-Home Buyers
1. Start Saving Early
With the LVR limits in place, it's evident that you'll need a substantial deposit to secure a mortgage. The sooner you start saving, the better. Don't just rely on KiwiSaver; consider other saving and investment options to fast-track your deposit.
Even a small, consistent saving habit can add up over time, giving you more flexibility when you're ready to buy. It's often beneficial to speak with a financial adviser to tailor a savings strategy that meets your goals.
2. Understand Your Borrowing Capacity
Knowing your LVR is essential, but it’s also critical to understand your borrowing capacity. Your ability to borrow is influenced by your income, debts, credit score, and other financial commitments.
Online mortgage calculators can give you a rough estimate, but consulting with mortgage brokers or financial advisers will provide a more accurate picture. They can assess your financial situation and guide you through the pre-approval process, making it easier to shop for a home within your budget.
3. Explore Special Lending Programmes
While LVR limits serve as a general rule, there are specific programs in place for first-home buyers that may allow for more lenient LVR ratios. For instance, the First Home Loan backed by Kāinga Ora enables eligible buyers to purchase with a smaller deposit.
These programs often have their own criteria and application process, but they can be a valuable pathway to home ownership. Research your options thoroughly and consider seeking professional advice to determine your eligibility.
4. Shop Wisely
Once you have a better idea of your LVR and how much you can borrow, it’s time to shop for properties within your budget. This may involve some compromises; perhaps considering smaller properties, different locations, or even looking at 'fixer-uppers' that you can improve over time.
Remember, the goal is not just to buy a home but to afford to keep it. Stretching your finances to the limit may get you a larger home, but it can make life stressful if you're constantly worrying about mortgage repayments.
5. Factor in Additional Costs
Purchasing a home involves more than just the deposit and mortgage payments. There are additional costs like legal fees, inspection costs, and mortgage insurance, especially if your LVR is on the higher end.
Budgeting for these additional costs ahead of time can prevent nasty surprises down the line, allowing you to transition into home ownership more smoothly.
What Happens When Property Values Drop?
If you purchased a property for $800,000 with an 80% LVR, your original mortgage would have been $640,000. If the property value drops by 10%, your home’s new value would be $720,000. Your new LVR would be calculated as \((640,000 / 720,000) \times 100 = 88.89%\), which is higher than your original LVR. A higher LVR can be a cause for concern, especially if you want to refinance your mortgage to a different bank or if you face unexpected life changes such as losing your job. In these cases, you may find it difficult to meet your lender's criteria for a new loan.
Generally, an increase in LVR due to falling property values is not an immediate concern if you can continue to meet your mortgage repayments. However, it's a situation that warrants careful monitoring, as it affects your financial flexibility and could lead to difficulties in refinancing or selling the property in the future.
Special Rates and Low Equity Premiums
In New Zealand, banks often offer "special" interest rates for borrowers with LVRs under 80%. These rates are generally lower than standard rates and can result in significant long-term savings. On the flip side, first-home buyers with high LVRs not only pay higher interest costs but are often hit with a Low Equity Premium (LEP).
A Low Equity Premium is an additional fee that lenders charge when your LVR is above a certain threshold, often 80%. This is to cover the increased risk the bank takes on by lending a higher proportion of the property's value. The LEP can either be a one-off payment or an ongoing fee added to your mortgage repayments. Either way, it’s an added cost that can make your first steps into home ownership more expensive than anticipated. This makes it even more essential for first-home buyers to understand LVR and how it impacts the cost of buying a home.
LVRs - not so tricky
The concept of LVRs is pretty easy to understand when considering only a single property for owner occupiers. Things get a little more complicated when considering LVRs over multiple properties, but that's a topic for another article.
Understanding and navigating LVR limits is an essential step on the path to home ownership for first-time buyers in New Zealand. Armed with this knowledge, you can save wisely, shop effectively, and enter the property market with confidence. Remember, the key to successful home ownership lies not just in securing a mortgage, but in managing it wisely for years to come.