18 May 2020

LVR restriction removal

LVR Restriction removal

There’s been quite a lot of news about the property market and the direction it will take over the last few weeks due to the effects of COVID-19

Few people wishing the market goes down and all developers go under ( yep, there always a few out there), while others wishing it stabilizes or continues to go up. Unfortunately, no one actually knows where the market will head till we go down to Level 1, or some sort of normality and the situation with the job losses comes to light. I for certain will know more towards the end of the year after the people that have asked for the mortgage holidays get back to paying their mortgages or sell their properties.

But in the meantime, the news I have been hearing is all about the LVR and the removal of its high restrictions.

 Reserve banks fast decision on removing LVR’s for 12 months is great for stimulating the current market or if not stimulating then keeping the market stable. These restrictions have been in place for seven odd years from memory and were bought in for two reasons, to improve the equity position of the borrowers i.e less chance of default in times like these and also to protect to banks in times of downturn where there is default and the value of the property is less than the equity i.e banks still have enough vendor equity in case the property value goes down. 

 The true test of how successful the removal of the LVR restriction is will be when the bank announces or modify the actual LVR criteria. The way I see the LVR restriction assisting the economy and the property market is that people will be able to borrow more money against their current portfolio which will assist with buying a new property and first home buyers who will be able to buy faster as they don’t need to save for longer. 

 Also, people who do not own property will require less savings, so it will assist with buying property faster. What we do need to vary of is the Banks lending credit policy, these seem to haven’t changed, the test rates for purchases haven’t changed, the appetite for risk is even lower with the banks than it was before the lockdown and I don’t expect this to ease in the short term. One of the main items the lower-income earners would struggle with is meeting the income test, where the banks take the interest at a higher rate for example 7% and test the income if the mortgage can be paid at this high rate. 

 Who will benefit the most with a reduction in LVR, high-income earners, couples with dual incomes who have been saving for a little while which is a 5-10% deposit. People who have a good credit history, able to service the loan ( i.e pass income test)  and if their loan is with the current bank.

 The minor issue we then face and need to be considerate about is what if the Reserve bank decides to bring the LVR’s up after 12 months or so – Will they put on pressure or will there be no pressure from the banks to repay the remainder of the deposit as long as mortgages are getting paid? This happened in 2013 and 2016 where the LVR rules changed, all this meant was that if refinance was required, or new finance was required the complete portfolio would be looked at the new LVR rate. If refinancing is not required then or no changes to the loan are required then I don’t see any issues.

 What does this mean from a development point of view for us? This doesn’t change a lot for our current loans and we don’t expect too many benefits of borrowing with the new developments either. The track record has been great which helps when applying for future lending and I don’t see the criteria for the lending for developers change.

Although speaking to the banks, there is less appetite for development currently in the market and this is not unexpected in the time of uncertainty. With lending, the developers generally get hit first due to the risk involved and this is fair as the risks involved in developing are extremely high. 

 So all in all, a good result from the LVR restrictions removal, but let’s watch this space how everything unfolds over the next few weeks and months.

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