Understanding LVR Rules for Investment Properties

This guide explains the current LVR rules for investment properties, how they differ from owner-occupier rules, and strategies for navigating these restrictions.

What is LVR?

LVR stands for Loan-to-Value Ratio. It expresses the size of your mortgage as a percentage of the property's value.

For example, if you borrow $560,000 to buy an $800,000 property, your LVR is 70%. This means you are providing a 30% deposit.

Current LVR Restrictions for Investors

The Reserve Bank of New Zealand (RBNZ) sets LVR restrictions to help maintain financial stability. Investment properties have stricter requirements than owner-occupied homes.

Banks have some "speed limit" capacity to lend above these thresholds, but this capacity is limited and typically reserved for strong applications.

Why Are Investor LVR Rules Stricter?

Investment properties are considered higher risk by the Reserve Bank for several reasons. Investment lending contributed to rapid house price growth, investors may be more likely to sell in a downturn, investment properties are secondary to owner-occupied homes in priority, and higher leverage creates greater systemic risk. The stricter rules aim to ensure investors have more equity at stake and are less likely to create instability in the housing market.

The New Build Advantage

One significant exemption exists for new build properties. Investment properties that qualify as new builds can be purchased with only a 20% deposit (80% LVR), the same as owner-occupiers.

What Qualifies as a New Build?

For LVR purposes, a new build generally means a property that has received its code compliance certificate within the last 12 months, an off-the-plan purchase where the building will be completed, or some properties converted from commercial to residential use. The new build exemption was introduced to encourage housing supply. By making it easier to finance new builds, the RBNZ aims to support construction of new homes.

Example Comparison:

This $80,000 difference can significantly impact how quickly you can grow your portfolio.

How Banks Determine Property Value

Your LVR is calculated based on the bank's valuation of the property, not necessarily the purchase price. Banks will typically order a registered valuation or use an automated valuation model.

Important considerations include that if the valuation comes in lower than the purchase price, you may need a larger deposit. Valuations can vary between valuers, and banks may be conservative in their valuations, especially in uncertain markets.

Strategies for Working Within LVR Restrictions

1. Focus on New Builds

With the more favourable 20% deposit requirement, new builds allow you to stretch your equity further. You can purchase a higher-value property or keep more cash in reserve.

2. Use Home Equity Strategically

If you own your home with significant equity, you can release equity to fund investment deposits. This allows you to maintain the required LVR on your investment while leveraging your existing asset.

Learn More: How to Finance Your First Investment Property

3. Consider Lower-Priced Markets

The 30% deposit requirement means you need less absolute cash for lower-priced properties. A $600,000 property requires $180,000 deposit, while an $800,000 property requires $240,000.

4. Joint Ventures

Partnering with others to pool deposits can help you meet LVR requirements sooner. Ensure you have proper legal agreements in place.

5. Non-Bank Lenders

Some non-bank lenders are not subject to RBNZ LVR restrictions and may lend at higher LVRs. However, they typically charge higher interest rates and fees.

LVR and Multiple Properties

When you own multiple investment properties, banks assess your overall LVR position. They look at total property values across your portfolio, total lending against all properties, and your aggregate LVR position. As your portfolio grows and equity accumulates, you may find it easier to meet LVR requirements for subsequent purchases.

LVR Changes Over Time

The RBNZ reviews LVR restrictions regularly and can change them based on economic conditions. In the past, restrictions have been introduced during periods of rapid house price growth, temporarily removed during COVID-19, tightened when property market concerns emerged, and adjusted to encourage new housing supply. Staying informed about potential changes can help you time your purchases strategically.