As a move to help slow down the housing market and avoid the risk of a sharp correction, the Reserve Bank has announced restrictions to the loan-to-value ratios (LVRs) to which the banks must adhere.

From March 1, LVRs will increase the deposit required by property investors to 30% and 20% for owner-occupier residents. More restrictions will be imposed from May 1, when there will be a further increase to 40% for investors, but deposits required by owner-occupiers will remain at 20%. The differing dates are to help mortgage lenders adapt to the new requirements.

What Is An LVR?

An LVR is the amount of money that a person can borrow. For example, if the property costs $600,000 and you have cash (or equity) of $400,000, you need to make up the purchase by borrowing $200,000. Your LVR would be ($200,000/$600,000) x 100 or 33%.

Therefore, you would have a sufficient deposit for the March 1 requirements but not sufficient when trying to arrange a loan after May 1.

Why Bring In LVR Restrictions?

LVR restrictions were removed on April 30, 2020 in an attempt to boost the economy due to Covid-19. However, with the housing market now booming, the Reserve Bank will again reinstate these restrictions to safeguard the economy and banks’ stability.

‘With the housing market now booming, the Reserve Bank will again reinstate these restrictions’

What Will Happen?

LVR restrictions will inevitably slow down the housing market and make it harder for both first home buyers and investors, who may only have small deposits, to arrange mortgages. However, those who have been riding the wave of vast capital gains in the last few years may have sufficient equity to continue on their journey, provided that the internal debt-to- income ratio and serviceability levels of the bank are attained.

Those highly liquid new investors, who have turned to invest in housing due to the higher returns able to be achieved than those offered by bank term deposit rates, will continue to enter the market. We could also see a sudden increase in investors’ buying activity before the May deadline.

How Will This Change The Housing Landscape?

Owner-occupiers and first home buyers will continue to enter the market, probably at a faster pace than property investors, which is good. However, this will not help tenants as potential rental houses are sold to owner occupiers and removed from the rental stock. Supply becomes more limited while demand for rental housing remains the same or increases, and rents will tend to increase. A balance has to be achieved between providing rental homes and homes for owner-occupiers while work continues slowly in the background to increase the supply of housing stock.

Can You Still Get A Loan If You Don’t Have Sufficient LVR?

Yes, banks do have a minimal amount of their borrowing capacity that will allow them to lend to individuals who do not meet the new LVR restrictions. If you believe you have found a good investment with a good return, and you have the ability to hold onto the property should the housing situation change, it’s always worth presenting your potential purchase to the bank and see what sort of a response you get.