This blog will hopefully give you some insight into the world of LVR.
LVR stands for loan to value ratio.
This determines how much the bank can lend on a specific type of property (subject to all other metrics being met).
I will start with the most common property type- this being owner occupied residential property.
Owner occupied residential property LVR
Typically the banks scale this type of property at 80%- this meaning they will consider an application with 80% loan 20% deposit.
Take a $1m purchase price this means you would need $200k deposit by way of Kiwi Saver, cash, shares being liquidated or gift to support the deposit.
This 80% LVR is not set in stone and it can be amended, but a majority of the bank loans have a resultant LVR of 80% or under.
The bank can do 10% of overall lending to borrowers with less than 20% deposit. The maximum LVR in this case is 90%, meaning you could potentially get into your own home with 10% deposit. The banks are more picky with these application and you do need to have a stronger servicing position than those applicants with 20% deposit or more. The banks work on a traffic light system in regards to low deposit loans i.e. less than 20% deposit. If they have “filled” their bucket and are close to 10% lending at this level they will close the door on these loans. For the borrower it is very much lucky timing to get through the gates, and most banks will only consider low deposit loans with a live contract in place with finance being made a condition of the clients offer on the property. Low deposit loans also limit you to your current transactional bank.
Note the above does not cover The First Home Loan via Kainga Ora- a blog on this will be coming soon.
It is important to note that should you want to buy a business or commercial property and you have useable equity in your own home a bank will consider you borrowing back up to 80% to support the purchase.
Say your mortgage is $100k and your own home is worth $1m. The maximum you could borrow on this property would be $800k. You would have $700k useable equity to assist with another transaction such as business purchase or commercial property purchase.
Investment residential property LVR
To help cool a hot property market the Reserve Bank of New Zealand (RBNZ) put in place an LVR cap of 60% on residential investment properties a few years back.
This meaning you need 40% equity to purchase residential investment properties which are not newly constructed.
Say you want to purchase a $1m property to rent out. The bank would consider lending $600k against the purchase price.
You would need to make up the extra $400k via cash introduced by you or borrowing against other assets/property for the bank to consider your request.
If you own your own home and an investment property the bank would scale your own home at 80% and investment property at 60%. Say both are worth $1m you could potentially borrow $800k against your own home and $600k against your investment property. If your mortgage is $300k this would allow you access to a further $1.1m (subject to bank approval) to assist with another purchase such as a business or commercial property.
It is important to note that for new builds you can borrow up to 80% on residential investment purchases.
We do have access to non-banks who will consider 80/80 split on owner occupied and rental properties.
Commercial property LVR
While the RBNZ regulations are strict on residential properties the “default” LVR on commercial property is very consistent and does not change.
Rule of thumb on commercial property is that the bank will consider any transaction with a resultant LVR of 65% or under. This meaning you as a purchaser would need 35% deposit via cash or useable equity in other properties as outlined below- this is common for both owner occupied and investment property purchases.
On modern commercial properties in good location, with a high NBS, and if used for owner occupied use i.e. business operates from the building they own the banks may consider going higher than 65%.
In these situations the banks may put 65% of the LVR on interest only and the remainder over 5 year term- therefore getting you back to 65% quickly. Again to borrow higher than 65% LVR on commercial property you need to have a strong trading business, the building will need to be owner occupied and the building itself must be of good quality in a good location with a healthy earthquake rating.
Summary
There are many ways to structure a transaction. Please call Lendal Mortgages Limited to make sure you are using your equity wisely!