Can you now buy your first property with little or no deposit?
The Reserve Bank of New Zealand (RBNZ), who regulate NZ mortgage lending, has decided to remove the loan-to-value ratio (LVR) restrictions until 1 May 2021 in response to the Covid-19 pandemic. This change marks the end of nearly seven years of LVR limits.
What were the LVR restrictions?
LVR restrictions were limits placed on banks by their NZ regulator to reduce the amount of low-deposit mortgage lending. They were imposed in October 2013 to help control the rapid growth of house prices and limit high-risk property purchases. Under these restrictions, most owner-occupied home loans required a minimum 20% deposit, while different rates applied for property investors.
Due to the economic fallout from coronavirus and the likely negative impact on the housing market, there was little reason for the restrictions to remain in place.
What is the impact of LVR removal?
Here are some possible impacts of the removal of LVR restrictions:
An improved possibility that banks will be able to support customers through the Covid-19 crisis and flow-on economic fallout. This might include extending mortgage deferrals to households with temporary cashflow issues, resulting in reduced risk of financial hardship for some bank customers,
Increased household debt,
An opportunity for home buyers to get onto the property ladder sooner than planned – so long as their financial position permits it, and
An opportunity for property investors to buy more property – so long as their financial position permits it.
Some commentators have pointed out the possibility of an increase in risky lending to highly leveraged borrowers, which raises the possibility of an even bigger eventual fall in NZ house prices than is already expected. Though even with the LVR limits removed, given the current uncertainty around the overall NZ economy and likely recession, it’s unlikely that mortgage lenders will weaken their lending criteria by supplying plenty of funding to “high risk” borrowers – such as those with limited ability to repay the debt, should their personal situation change. In fact, moving forwards, given the risks present in the overall NZ economy we think lenders (mostly banks), will apply even more rigour when assessing loan applications from all borrowers, and most especially those with a small deposit, or no-deposit at all.
Ordinarily, when lending restrictions such as the LVR rules are removed, there might be an increase in residential construction activity – as more funding should be available. However, in addition to the comments in the paragraph above, given the overall issues the wider NZ economy faces at the moment, this is doubtful.
So, what has changed now the LVR restrictions have been lifted?
Not much has really changed. That’s because the major lenders, including the banks, already had exemptions to lend to a modest number of borrowers who did not meet the LVR restrictions.
Some of the basic criteria for high LVR lending are:
High credit score,
Responsible debt repayment history,
Good account conduct – which normally means a good track record of personal spending proven by the transactions showing on your bank account statements,
Stable employment and income, and
Most importantly, high affordability rate. This is the ability to make loan repayments and still have a regular surplus of cash left over.
But are home loans with no or little deposit a good idea?
In general, this is not recommended, and usually not possible because borrowers must meet the five criteria above.
However, if you are in this group, then here are some pros and cons to this type of lending:
Possible benefits of home loans with no or little deposit
A home loan with no deposit may give first home buyers a way to enter the property market which might otherwise be unaffordable. However, home loans with no savings are not generally designed for first home buyers.
Property investors with some equity in a property but no or little savings in the bank could use equity for the deposit on an investment home loan.
To purchase a property in one of New Zealand’s more expensive cities such as Auckland, Wellington, or Christchurch, it takes time to save up a sizeable deposit. First home buyers with high incomes but not much saved who can afford the repayments may be able to get onto the property ladder sooner than expected.
In the time it often takes to save up a sizable deposit for a home, the property market may have risen significantly, depending on the individual property and its location (and of course depending on how much prices fall because of Covid-19 related issues). In that sense, purchasing a home without a deposit may help the prospective purchaser to buy prior to this rise in property prices, which means securing the home at a comparatively lower price.
Possible disadvantages of home loans with no or little deposit
Lenders may charge higher interest rates if you borrow more than 80% of the property’s purchase price.
The more you borrow, generally the more interest you will have to pay to the lender in the long run.
Usually, you will have to pay Lender’s Mortgage Insurance (LMI). This is sometimes also referred to as Low Equity Premium (LEP) or Low Equity Margin (LEM). Depending on the bank, this is usually a percentage of the total lending or an interest margin in addition to the offered rate. Either option can become very expensive.
The approval process is often longer and stricter. This is because of the need for additional credit checks on the borrower (you), and valuations for the property that you intend to purchase.
If you borrow the full purchase price, you may end up owing more than what the property is worth if the value of your property decreases in the early days while paying off your mortgage. This is called being in ‘’negative equity’’. While this can happen to all borrowers, those with a very little or no deposit are much more exposed.
LVR restrictions removed – the bottom line
As always, we strongly encourage a responsible and thorough approach is taken to any borrowing decisions.
We understand that everyone’s financial position, aims, and risk tolerance are different. As a result, while the removal of these restrictions might not change much, it could present an opportunity for some.
Therefore, it would be the pleasure of our lending team to discuss this with you and assist and support you throughout the process. Just leave your details with us and we’ll be in touch within a workday.