Last month, the Reserve Bank announced plans to introduce new LVRs targeting investors throughout New Zealand, who will now need a 40 per cent deposit when borrowing for mortgages. KiwiSaver’s HomeStart Grant has also had some changes, with both income and house price caps increasing in order to meet the scheme’s objective of helping middle income earners into their own homes. Read on to find out more in this month’s property article.

LVR restriction update

In a move to slow down rapidly rising housing costs, the Reserve Bank announced last month changes to the loan-to-value restrictions (LVR).

Under the new restrictions:

• No more than 5% of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60% (i.e. a deposit of less than 40%).
• No more than 10% of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80% (i.e. a deposit of less than 20%).
• Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

According to Reserve Bank Governor Graeme Wheeler, “The banking system is heavily exposed to the property market with residential mortgages making up 55% of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength.  The proposed restrictions recognise the higher risks associated with such lending.”

The new restrictions will take effect on 1 September and will apply to lending throughout New Zealand, rather than just in Auckland.

Changes to HomeStart Cap

Building and housing minister Nick Smith announced last month the government is increasing the scheme’s income and house price caps.

“We are adjusting the income and house price caps to take into account increases in both since the scheme was announced, so as to ensure it achieves its objective of helping middle income earners into a modest home.”

The house price cap on a house purchased under the HomeStart Grant has increased from $600,000 to $650,000 in Auckland, and between $400,000 and $550,000 for the rest of the country.

The income caps have increased from $80,000 to $85,000 for a single person and from $120,000 to $130,000 for a couple.

New home price caps have also increased by an additional $50,000 to help drive growth in new house builds. The increases will also be applied to the Welcome Home Loans, which enable first home buyers to buy with a 10% deposit and are exempt from LVR ratio limits.

“These HomeStart and Welcome Home loan changes help first home buyers by giving them a cash grant for a deposit, while the Reserve Bank’s capital LVR changes, effective from 1 September, make it harder for low equity housing investors,” said Smith.

The changes are just part of the Government’s plan to meet New Zealand’s housing crisis, and help improve home ownership.

On commenting about the changes to HomeStart, Labour Party leader Andrew Little said it was hard to find a house for sale for under $600,000 in Auckland.

“It is good news for many would-be first homebuyers outside our biggest city that the Housing Minister is raising the thresholds but, for those in Auckland, the government’s failure to address the housing crisis means houses are simply not being built for $650,000.”

“The government needs to build affordable homes and crack down on speculators – the two things that would actually make a difference in Auckland.”

Over the last year only nine per cent of the grants made through the scheme have gone to Aucklanders, yet Auckland accounts for a third of the population.

Income is more important than deposit

If you’re looking to buy a house, how much you earn may be more important than how big your deposit is. A recent shift in lenders’ attitudes means that banks are focusing on a borrower’s ability to service a loan, rather than how much deposit they’re bringing into the deal.

To calculate affordability, banks generally apply a test using a range of interest rates to determine whether a borrower can still service a loan if rates rise. Banks are also required to operate under the Responsible Lending Code, requiring them to demonstrate confidence in a borrower meeting repayments without suffering hardship.

Since the Global Financial Crisis in 2007 – 2008, income has become a far more critical component. Banks are also keen to appear prudent to the Reserve Bank in its efforts to slow the housing market.

Talk to us

If you’re concerned about how the changes to LVR or HomeStart will affect you, get in touch with me and let’s talk through your options.