Disclaimer:
This article provides general information only and does not constitute financial, legal, tax, or investment advice. Property investment involves risk. Always do your own research and seek personalised advice from qualified professionals before making investment decisions.
Key Takeaways
- Investors usually need a larger deposit than owner-occupiers, while qualifying new builds may receive more favourable treatment.
- LVR is based on the bank's valuation, not always the purchase price.
- Stricter investor LVRs reflect higher market risk and volatility.
- New build exemptions can accelerate portfolio growth.
- Equity release, joint ventures, and non-bank lenders are alternatives.
Loan-to-value ratio (LVR) restrictions are one of the biggest hurdles for property investors in New Zealand. Understanding how these rules work, what exemptions exist, and how to work within the restrictions is essential for anyone looking to build an investment portfolio.
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.
LVR Formula: LVR = (Loan Amount / Property Value) x 100
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.
Current LVR Limits:
- Owner-occupiers: Usually assessed against an 80% LVR benchmark, with limited high-LVR bank lending allowed
- Investors (existing properties): Usually need a larger deposit than owner-occupiers, and bank policy may be stricter than the RBNZ minimum settings
- Investors (new builds): May qualify for more favourable LVR treatment with some lenders
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 concession exists for qualifying new build properties. Some lenders may apply more favourable LVR treatment to new builds than to existing investment properties.
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:
Purchasing an $800,000 investment property:
Existing property: 30% deposit = $240,000 required New build property: 20% deposit = $160,000 required
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 more favourable LVR treatment, qualifying new builds may allow you to stretch your equity further. You may be able to purchase a higher-value property or keep more cash in reserve, depending on lender criteria.
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
Because investor deposits are larger than owner-occupier deposits, lower-priced properties require less absolute cash. For example, under a 30% deposit scenario, a $600,000 property requires $180,000 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.
Calculate Your Borrowing Capacity
Use our equity calculator to understand how much deposit you have available and what property value you could target.
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.