At the beginning of 2021, some New Zealand banks have tightened further their loan-to-value ratio (LVR) for investment property to 60 per cent. This means the minimum deposit for investment property has been lifted to 40 per cent.

Back to the end of last year, ANZ was the first to increase the minimum deposit required for an investment property loan from 30 per cent to 40 per cent. Other mainstream banks didn’t join the move to require higher deposits until the beginning of 2021, in part due to the rapid acceleration in the real estate market and new records being set for the house price.

In this video, we’ll update with you the latest LVR changes from banks in terms of investment property loans. Besides, we’ll share three tips on helping you buy a rental property if you do not have enough deposit or equity. At the end of the video, you’ll get inspired on what you can do on your current structure so that you can grab the opportunity while you still can.

LVR restrictions 2021: loan-to-value ratio for investment property

Video Timeline

1. LVR restrictions changes for investment property – 01:11

2. How to buy an investment property if I don’t have enough deposits? – 04:11

3. What action should you take before all banks apply 60% of LVR restriction to investment property loans? – 09:14

1. LVR restrictions changes for investment property

Some New Zealand mainstream banks including ANZ, Kiwibank, ASB, Westpac, and BNZ have announced more “stringent" lending policy changes – the LVR, or loan-to-value ratio, for investment property has been tightened to 60 per cent. The new LVR rules mean if you’re looking to borrow for an investment property from these banks, you will be required to have at least 40 per cent deposit.

Meanwhile, Chinese banks (e.g. Bank of China) and BNZ still lend 70% LVR for investment property loans, at the time of writing (10^th Feb, 2021). You might notice that BNZ falls into both categories, and here’s the reason:

BNZ announced a special rule – BNZ will no longer accept loan applications from the mortgage adviser channel on behalf of investors unless they have at least 40 per cent deposit. However, if borrowers choose to deal with BNZ directly, the minimum deposit for investment property is still 30 per cent.

This is the first time we witnessed that the bank introduced discrepant lending policy targeting on different channels. In this case, BNZ encourage borrowers to deal with the bank directly, rather than working with a mortgage broker. It’s such a pity to see that BNZ are not acting in clients’ best interests because customers may not get the best possible advice.

On the contrary, experienced mortgage brokers (like us) stand in clients’ best interests – we understand the application criteria for different lenders, and most importantly, we make tailored home loan solutions that help clients protect their assets, boost tax efficiency, increase flexibility, make save in interests, and so much more. That’s why we are so proud of ourselves.

2. How to buy an investment property if I don’t have enough deposits?

If you are looking to buy an investment property and you are struggled to get enough deposits/equity, here are three options you can potentially borrow for an investment property:

Option 1: Buy a new property

The new build is exempt from current LVR restrictions. Loans for the new build are only required to provide 20 per cent deposit, even it’s for investment purpose.

A new property is defined by the condition of the CCC issued within the last 12 months. It can be an off-the-plan, a property under construction, or an existing property as long as the CCC was issued during the previous 12 months.

Option 2: Deal with non-bank lenders that still lend 80%

The term “non-bank lending” or “second tier” refers to those lenders who provide lending services but are not the traditional registered banks. When your bank says no, or you need more borrowing amount, non-bank lenders could give you more lending options.

Some non-bank lenders can still lend 80% because they aren’t governed by the New Zealand Reserve Bank. Instead, they make their own lending policies based on their appetite.

Non-bank lenders charge higher rates than traditional banks, generally from 3% to 7%. This is because their interest rates are risk-driven and also have different funding sources from the banks. Despite the higher rates they charge, non-bank lenders help you widen your solutions.

Option 3: Consider a Registered Valuation (RV)

By default, banks order an Estimated Value (EV) from their provider to determine the value of a security for a mortgage, and CoreLogic and Valocity are two major providers. The report is machine-generated, and it contains an estimated market value calculated by looking at recent comparable sales data of the properties located in the surrounding area.

However, the EV may not reflect the actual value of your property. If you sell your property in today's rising market, you probably end up with much higher value than the EV used by banks. 

If you’re looking to use the equity to buy an investment property, but in the eyes of banks, your property’s value is not as high as you expect, you might need to consider a Registered Valuation (RV). 

A registered property valuation is an independent assessment of a property’s market worth conducted by a professional registered valuer. The registered valuation is based upon a full inspection of the property as well as the comparable sales data in the surrounding area. When valuing a property, a valuer will undertake a physical inspection of the property and they will take into account the interior conditions as well as sales already happened but not settled yet.

Tips: If you know your neighbours sold the property $200K for instance above the EV, and your property is much better than their property, then you should let the valuer aware the sale price surrounding your area during the past few months, so that you can get the best possible value of your property.

The registered valuation is not free though - it usually charges around 0.1% of the property’s value. As always, we’ll discuss this with you if you’re applying for a loan with us.

3. What action should you take before all banks apply 60% of LVR restriction to investment property loans?

Some banks have already tightened their LVR restriction for an investment property loan, but some other banks/lenders currently apply 70% of LVR restriction. Before they may follow the leads, you can do something to lock in the unused equity in your existing properties, so that you maximize your borrowing capacity for purchasing your next rental property. We covered this topic from an article published on 20 Nov last year.

Here’s a case study illustrating how our clients benefit from reviewing their loan structure by us:

The clients have a family home and two rental properties. The family home and one of the rental properties are secured by ASB, Westpac secures another one. Over the last 12 months, the Westpac rental property has gone up value significantly. We recommended the clients to discharge their family home from the bank to reduce the risks, but they had concerns:

They have a revolving account (called Orbit) from ASB that have the limit of $550k, which is a great facility allowing them to withdraw up to the limit when needed. In the old days you could have a very high revolving limit like this client, but now most of the banks cap the limit to $250k- $350k. If they leave ASB, they won’t have a chance to get a revolving facility with such high limit. Their another concern was the overall LVR at ASB alone is not low enough to discharge home yet.

After reviewing their current loan structure, we suggested that:

They could top up $500k from the loan against Westpac investment property security, because the property has gone up a lot in value. $300K would be used to partially replace ASB Orbit account so that their Orbit could be reduced to $250K, which means they would still have the $550K revolving but made up of ASB $250K and Westpac $300K. Even though they move to another bank later, ASB wouldn’t hold the string.

The remaining $200K would be used to repay their existing fixed loan from ASB. This way, the total loan amount against ASB would be reduced by 500K. As results, they could top up to 70% of the loan against the Westpac property (at the time of writing, Westpac allowed 70% of LVR on investment property loan).

Even though Westpac would tighten their LVR further in the future, they’ve already secured the equity. On the other hand, ASB rental property also get up to 70% and their home was mortgage free. That was great! Also, we helped the clients remove Orbit constraint so that in case they do have to move away from ASB in the future, and they are free to go.

If you’re planning to apply for a home loan to buy your next investment property, we highly recommend you reviewing your loan structure now, so that you can grab the last chance while you still can.

Prosperity Finance - Here to Help

Got questions? Or seek help? We’re more than happy to chat. Call us at 09 930 8999 for a chat with one of our mortgage advisors. At Prosperity Finance, we don’t have a one-size-fits-all solution for your home loan. We look at your case, understand your needs and situation then make a tailored solution for you.

Read More:

Loan to value ratio (LVR) restrictions for investment property return to 70%

How do New Zealand banks determine the value of your house for a mortgage?

Could a non-bank lender offer a better solution than your bank?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.