There has been so much talk in the news about LVR (Loan to Vale Ratio) restrictions but exactly what is an LVR and how is it calculated and more importantly how does it effect what we can do.
LVR is the percentage of the loan compared to the value of the property. If you have a house worth $100,000 and the loan is $80,000 your LVR would be 80%. If you are looking to purchase a new property and you were advised you needed a 20% deposit this is 20% of the purchase price ie $20,000.
If you are building the LVR is determined by the purchase price or the registered valuation of the land PLUS the cost for the building eg you own a section worth $200,000 and the building costs are $300,000. The Lender would then consider the Value of the “project” to be $500,000. If you were advised you needed a 20% deposit you would be required to have $100,000. Often the valuation at the end of the project is more than the value of the land plus the building costs but the Lender will work off the lower figure.
Common misconceptions made by clients in regards to LVRs are as follows:
1) When people are calculating equity in their property to see if they can increase their lending they sometimes work off the equity as being the true equity as opposed to being the usable equity. Eg if someone owns a property worth $500,000 and a loan of $400,000 they are at 80% LVR and rightly so they would have 20% equity ie $100,000. They want to purchase another property at $500,000 believing they have 20% equity. This means that they would have $900,0000 secured by property worth $1,000,000. This makes the LVR 90% on 2 properties so this may well be a no go at this time!
2) Many clients believe that they cannot secure lending above 80% due to the Reserve Bank restrictions – this is not true. There are many options available including simply borrowings above 80%. Lenders are definitely making it more difficult to borrow above 80% and pricing of these loans is more than 80% but Lenders are open for business in this space.
3) Many clients believe lenders will lend above 80% in all areas. Loans above 80% are “area sensitive”. This means that there are areas that Lenders will not lend above 80%.
4) Some clients believe that if they are putting in less than a 20% deposit it won’t matter where the deposit comes from. If you have less than a 20% deposit the lender wants to see that you have saved at least 5% of the purchase price. Savings can be the surrendering of superannuation such as Kiwisaver but savings is not from a gift or a loan.
Due to the Reserve Bank restrictions on LVRs it should be noted that lending criteria for loans under 80% are a lot easier than above 80%. Lending Criteria above 90% is definitely the hardest to satisfy.
At this time we can have no assumptions on LVR restrictions. You need to identify what options are available specifically to you and your situation as you may well have more choices than you think.
