What is a Loan-to-value Ratio (LVR)?

Loan-t0-value ratios (LVRs) were first introduced in 2013 in an attempt to cool the overheated property market. Over the years, they’ve been amended a few times.

They were removed entirely in response to the economic impact of the pandemic, before being reintroduced in 2021 and tweaked twice. And, from July 2024, they’re getting another overhaul.

But what are LVRs and how do they affect mortgage borrowing. In this article, Canstar explores what you need to know about loan-t0-value ratios in New Zealand.

What is a loan-to-value (LVR) ratio?

An LVR refers to the size of a loan compared to the value of the property it’s used to purchase: what percentage of a property’s purchase price is covered by the loan.

For example, if the home you want to buy is worth $1 million, and you have a $300,000 deposit, then you’ll require a $700,000 loan to purchase the property. This means 30% is coming from you, and 70% from the bank: an LVR of 70%.

Generally, banks are happy to lend up to 80% of a home’s value. A 20%-plus deposit will also, usually, secure you a more favourable interest rate on your mortgage.

How do LVRs affect getting a mortgage?

Banks have to adhere to strict limits on the number of home loans they can issue to borrowers with low deposits, as these mortgages are considered riskier.

The LVR restrictions are set by the Reserve Bank of New Zealand (RBNZ), which has recently increased the amount of low-deposit lending banks are able to make.

From July 2024, banks will be able to grant:

• 20% of owner-occupier lending to borrowers with an LVR greater than 80% (up from 15%)
• 5% of investor lending to borrowers with an LVR greater than 70% (up from 65%)

Potentially, these changes will make it easier for those with smaller deposits, such as first home buyers and those on low incomes, to buy property.

Are there any exemptions to the LVRs?

There are a few exemptions to the LVRs, including borrowing money to fix a leaky home, which is an expensive business. But the two most relevant to house-hunters with low deposits are:

Loans to buy new homes: if you buy at an early stage of construction, or buy from a developer within six months of completion, the LVR rules will not apply to your loan application. Currently, many smaller townhouses and apartments are being built. These provide a great opportunity for Kiwis with smaller deposits to purchase first homes.

First Home Loans: Kāinga Ora’s First Home Loans are designed specifically for those with deposits as low as 5%.

→ Related article: What is the First Home Loan?

Will a small deposit stop me from getting a home loan?

While it is harder to secure a mortgage with a low deposit, it’s not impossible, especially in light of the relaxed LVR restrictions. Banks will also look more favourably on you if you:

• Can prove that you have a solid financial head on your shoulders
• Have a spotless credit history and credit rating
• Have a good, steady job
• Can prove that you live within your means and know how to save regularly

However, low-deposit home loans do come with a catch. Lenders will often charge a premium on top of their normal interest rates, either as an ongoing levy or as a one-off fee. For more on the subject, check out our story: Low Deposit: What are Low Equity Premiums?

Or your lender might require you to take out lender’s mortgage insurance. The policy covers the lender for any losses it might incur if you default on your loan. Premiums are usually added to the cost of your loan.

So if you are considering a low-deposit loan, you might be better off delaying your aspirations of home-ownership until you can save a bigger deposit. For, in the long run, it could secure you a cheaper loan.

Cheapest Home Loan Rates for First Home Buyers

The table below displays some of the 1-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for first home buyers. This table is sorted by current interest rates (lowest to highest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Cheapest Home Loan Rates for First Home Buyers

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.