The news that loan to value ratios (LVRs) will be relaxed from 1 January 2018 wasn’t the big bang that most people had been expecting (or hoping for).
The Reserve Bank says they are easing LVRs due to our stable economy and the changes we’re seeing take place in the housing market. Prices are cooling or softening around the country, the new Government has already moved to ban foreign buyers, and with more legislative change set to come they believe the housing market is ready to have lending restrictions rolled back.
What does this mean for home buyers?
An LVR is calculated using the value the bank places on your property—the amount of debt vs. the value of the house. If you are looking at a house worth $250,000, you could secure a mortgage with a deposit of $50,000—meaning your loan is $200,000 and the LVR is at 80 per cent.
These changes are small and gradual. From 1 January 2018 the LVR policy will require that no more than 15 percent of a Bank’s new mortgage lending to owner occupiers can be at an LVR of more than 80 percent (a slight shift from the 10% cap currently in place), and no more than 5 percent of new mortgage lending to residential property investors can be at the LVR of 65 percent (up from 60 percent currently).
For first home buyers, this means banks have more room to approve lending to borrowers who have an LVR of more than 80 percent. Currently, they can allocate 10 percent of their lending to these mortgages with a deposit less than 20 percent. Traditionally they operate cautiously within their LVR limit (anecdotally this is around 7-8 percent) so overall the five percent shift won’t likely mean much of a change. Investors may get more out of this announcement—already having equity may benefit them by having their minimum allocation of 40 percent deposit reduced to 35 percent.
How will this affect the Banks?
Today banks have only a small amount of high LVR loans to issue, and outside of a Welcome Home loan or construction loans, high LVR pre-approvals are almost nonexistent. Their ‘allocation’ of high LVR loans can change each day as well, which can make it incredibly difficult to get pre-approved. I believe Banks will continue to be cautious but there may be a fraction more borrowers get through the gate with a low deposit.
We regularly see ‘quality’ borrowers who fall just outside the Welcome Home Loan criteria, due to their income or the housing price caps who struggle to get pre-approved. So it often means placing a conditional offer and hoping there is allocation available on the day from a major Bank. While these changes are a small step in the right direction, they won’t be big enough to make a decent immediate difference. Our advice? Talk to a trusted mortgage adviser, the environment is changing every day. In some cases you may need to place a conditional offer before getting pre-approved. A mortgage adviser will be able to advise the chances of getting approved and with what bank and lending option at any given time.
Ask us to help you get pre-approved.