A lot is being touted in the media about the LVR restrictions and what it means, not only for first home buyers, but also for main stream “Mum & Dad” who might like to supplement their retirement now by buying an investment property.
With the Reserve Bank recently rolling out tighter criteria on what makes up a 40% deposit or a 20% deposit (for first home buyers) I thought I would unpack for you how that might look.
Loan-to-value ratio (LVR) is a measure of how much a bank lends against residential property, compared to the value of that property. Borrowers with LVRs of more than 80% LVR (less than 20% deposit) are often stretching their financial resources. They may be more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates. When we talk about high-LVR (low-deposit) lending, we are generally referring to someone with less than a 20% deposit – or an LVR ratio of greater than 80%.
LVR is the amount of your loan as a percentage of the value of the property you are buying. For example, if you want to buy a property worth $1,000,000 and you have a deposit of $200,000, then you are borrowing $800,000 against a $1,000,000 property. Your LVR would be 80%.
The process is different if you already have an existing home loan and want to buy the house down the road as an "investor".
You can borrow up to 80% of your existing home and up to 60% of the value of the investment property.
Your own home is worth $500,000
You owe $385,000
Hence the amount you owe is 77% of the value (LVR is 77%) so you can top up* $15,000 towards an investment which would then take your overall LVR to 80%.
The investment property you want to buy is worth $300,000 and you can borrow 60% ($180,000). Add the $15,000 you can top up your own home by and you have a total of $195,000.
So in this scenario you will obviously not be able to purchase the new investment.
On a brighter note, the more equity you have in your own home means the less restricting it becomes to purchase an investment property.
For example:
Your own home is worth $685,000
You owe $239,000
So your LVR is 34% and you can then take your overall LVR to 80% to borrow an extra $309,000 towards an investment property.
*Subject to lending criteria and applicants ability to service increased borrowings.
The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.
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