OCR and LVR changes by the Reserve Bank – How do these affect you?

OCR is the ‘Official Cash Rate’ and influences the interest rates banks offer on lending. LVR is ‘Loan to Value Ratio’ and defines the amount you require as a deposit. Both of these have considerable impact on borrowers, be it for your own home or an investment property.

The recent changes to the LVR now mean that you need a larger deposit for an investment home and with some banks an owner occupied home, anywhere in New Zealand. This was changed primarily to avoid banks giving out high risk loans and jeopardising their financial strength as an institution. With prices still rising around the country, many loans could be considered high-risk – particularly in Auckland, where a ‘correction’ is considered possible.

Regrettably this also pushes many home buyers out of the market. But there may be solutions to this with second tier lenders and credit unions that we have access to – ask us about them.

The biggest impact of this LVR change however is with those wishing to buy an investment property, as these now need a 40% deposit. More on that in the article below.

While this all looks like doom and gloom for many, the forthcoming OCR announcement is expected to see rates drop again, so there is good news looming.

How do changes to the investment property LVR affect you?

Take time to follow this through. It is important that you understand the implications.

Firstly, pre-approvals still stand until expiry date, but will not be rolled over. So if you are in the hunt stage but have pre-approval, then keep looking! But you have limited time.

What if you own your own home and want to use the equity in that? This is where it gets more complicated. Banks will not add your own home and the investment property together and use a combined LVR of 80%, even though your own home may be at that. Banks split the two out, so the investment property has to be 60% LVR.

There are further implications. If you want to borrow for a car, renovations or other personal reasons, these changes will also affect such borrowing if property is held as an investment already.

Overcoming the LVR rules for your own home purchase

Two banks will still lend up to 95% for some owner occupied homes, and of course there are non-bank lenders that could fit your requirements. Please ask me before worrying about things. And remember, if you have children wanting to buy their own homes, have them come and see me. I will happily discuss options at no cost.

Why is the OCR so low and expected to stay this way?

It’s because inflation is so low. The Reserve Bank is expected to maintain inflation at between 1% and 3%. It is much lower than that right now. Lowering interest rates means businesses can invest in new plant and business ideas and as consumers we have more confidence to spend more. This is one way to stimulate small inflation jumps. Inflation is necessary to help economic growth.

As explained in previous newsletters, you may be locked into a higher rate, say 6.5%+, so are unable to take advantage of the current very low rates at just over 4%. But I can help you work out if it is worth paying the break-fee, which in many cases it is. You have nothing to lose by calling me, as it’s free, but a lot to gain.