Why you should split bank to take advantage of the loan-to-value (LVR) rules

Mortgage changes DTI rules spotlighted Reserve Bank eases LVR restrictions

While most of the recent attention on mortgage rule changes has concentrated on implementing the debt-to-income (DTI) rules, it is worth noting that on the same day this change came in (July 1st), the Reserve Bank also slightly relaxed the loan-to-value restrictions on secondhand investment properties.

Firstly, a quick explanation of what loan to value (LVR) rules are:

• Loan-to-value ratio (LVR) rules in New Zealand are restrictions set by the Reserve Bank of New Zealand to manage lending risks in the housing market. 
• They are the percentages of lending that a bank can lend against the value of the property it is taking as security. For example, a $700k loan against a $1m property is a 70% LVR.

1. For owner-occupiers purchasing or leveraging property:

• A minimum 20% deposit is generally required, meaning a maximum LVR of 80%.

2. For residential property investors purchasing or leveraging existing property:

• A minimum 30% deposit is required, meaning a maximum LVR of 70%.

3. Exceptions and variations:

• First-home buyers may access lower deposit options, such as the Kāinga Ora First Home Loan with a 5% deposit.
• Some banks may offer low deposit options for first-time buyers with 5-19% deposits.
• New builds and construction loans may be exempt from LVR restrictions. The Reserve Bank has changed the rules multiple times since its introduction in 2013.

Reserve Bank Governor Graeme Wheeler implemented the first LVR restrictions in October 2013, aiming to slow house price growth, particularly initially in Auckland. However, these initial measures proved ineffective, as Auckland house prices rose for the next three years. 2016 the restrictions were tightened, requiring a 40% deposit for existing investment properties in Auckland and 30% for the rest of the country. Over the following years, the Reserve Bank made several adjustments to the rules.

In April 2020, as part of the Covid-19 response, LVR restrictions were temporarily removed. This led to a significant increase in house prices as the country emerged from lockdown and throughout 2020. The restrictions have been modified multiple times since their inception, with at least five changes occurring since 2020. These adjustments reflect the Reserve Bank's ongoing efforts to manage housing-related credit growth and house price inflation.

Now, on to why you should split bank to take advantage of LVR rule changes!

When you have multiple properties at one Bank the Bank is limited to lending you against the collective security value. For example, let's go back to when the Reserve Bank removed the rules in 2020 when it was possible to purchase existing investment properties at 80% LVR.

You may have had equity in your home which you had a mortgage at ABC Bank and decided to purchase a couple of investment properties and ended up with a situation that looks like this:

Personal home

Value = $1m

Existing mortgage = $600k

Invest buy No. 1

Purchase price = $500k

New mortgage = $500k

Invest buy No. 2

Purchase price = $500k

New mortgage = $500k

ABC Bank would have used equity in your home to enable you to purchase the two investment properties. What they actually did looks closer to the below, as they used equity in your home to enable you to purchase the two investment purchases.

Personal home

Value = $1.25m

Existing mortgage= $600k

Top up mortgages

2 x $100k

= $800k total

Invest buy No. 1

Purchase price =$500k

New mortgage = $400k

Invest buy No. 2

Purchase price =$500k

New mortgage = $400k

While the positive effect of relaxed LVR rules is that it becomes easier to leverage, the opposite applies if everything is held with one bank.

As we saw across 2021 when the rules tightened, and it became only possible to leverage to 60% and then 2022 and up to now, when we have had a tighter property market which erased much of the growth from the low interest rate Covid market the above investor ended up having a position which more looked like this:

Personal home

Value = $1.25m

Existing mortgage= $800k

$200k equity available at 80% LVR.

Invest buy No. 1

Purchase price =$500k

Mortgage= $400k

Negative $100k usable equity as max LVR 60%

Invest buy No. 2

Purchase price =$500k

New mortgage = $400k

Negative $100k usable equity as max LVR 60%

In this case, the negative usable equity from the two investment properties offsets the available equity in the investor's personal residence, so they can't do anything. At this stage, they are limited to waiting for capital growth or non-bank solutions to invest further.

However, if they had separated the investment properties to a different bank so that the only property held with ABC Bank was their home, then ABC Bank would not need to take the current negative usable equity position into account as these are held by a different lender.

In this case, it is possible to unlock the $200k usable equity in their home by leveraging it to 80% and then bringing in a further bank lender for the remaining funds to complete another investment purchase.

Note that we could not return to the bank holding the investments at this stage because of its negative usable equity position.

Besides the clear benefit mentioned above, there are also differences between banks regarding how they assess a client's maximum loan affordability. Split banking allows for access to further lending and potentially making another purchase.

Key Recommendation

With the relaxing of investment loan-to-value rules, either now or when your fixed rates come off, now is the perfect time to ensure you benefit from the above structure. If you would like to discuss this further, please get in touch with us HERE.

About the author: Kris Pedersen is a leading figure in mortgage advising and property investment, consistently ranked among the country's top six mortgage advisers for the past four years. With over a decade of experience, Kris is the preferred choice for investors seeking expert guidance to expand their portfolios. He shares his insights as a respected speaker at Property Investor Association groups, and his expertise extends to New Zealand and overseas property and finance markets, with regular features in NZ Property Investor Magazine. Kris Pedersen and Kris Pedersen Mortgages Limited are registered financial service providers, ensuring transparency and reliability in all financial dealings. Their credentials on the Financial Service Providers Register can be viewed here: https://fsp-register.companiesoffice.govt.nz/