New Zealand: The impact of LVR rules for first home buyers, and new Christchurch rateable values

The Reserve Bank LVR (loan to value ratio) rules were introduced in late 2013 and imposed a "speed limit" on banks' lending to those borrowers with less than equity of 20% of the purchase price of the house they were looking to purchase.

Only a small percentage of loans where the borrower has less than 20% equity are now able to be issued by each bank.

The LVR rules were designed to reduce risk of the overall financial system, reduce the risk to those that are vulnerable when there is an economic shock (for example a recession) and also to alleviate the pressure on the housing market within New Zealand.

This move saw an initial decline in new loans but banks quickly offered alternative lending structures to accommodate borrowers that might not meet the 20% deposit requirement.

Since the announcement of the LVR rules, there have been a number of banks which have promoted different types of lending structures which enables family members to give one another financial assistance when buying a home.

We will use the example of a young couple purchasing a house with the assistance of their parents to illustrate how some of these structures work.

The young couple are looking to purchase a house for $400,000 but only have a deposit of $45,000.00. They therefore need an additional $35,000 to meet the 20% equity LVR requirements.

Under a "springboard" lending structure, the young couple would be the main borrower and borrow the majority, usually 80% of the purchase price ($320,000).

The young couple and the parents would then borrow an amount sufficient to get the young couple to the 80% lending threshold (i.e. $35,000). This loan would be secured by not only a mortgage of the young couple's property but also that of the parents.

This structure results in the parents only being liable for the loan that is in the names of the young couple and parents (the 20% loan).

However, it is important to remember that all named borrowers under a loan agreement are jointly and severally liable and therefore each borrower is ultimately responsible for the repayment of the loan if the other borrowers' fail in their obligations to the bank.

As the loan is secured by a mortgage over the young couples and the parent's home, if all parties fail to meet their obligations under the loan and mortgage agreements, the bank may sell their either or both of their properties by way of a mortgagee sale in order to meet the parties obligations under the loan and mortgage.

Parent's must therefore be aware of the risks associated with these forms of lending and it is worth exploring whether a gift or a personal loan to your child is a better option.

Other considerations that need to be taken into account include whether you are going to help out each of your children in the same way, possible relationship property issues in the future and also whether you being named as a borrower and also having a mortgage over your property will adversely affect your financial position now or in the future.

Commentators are predicting an end to the LVR limits in the near future. Only time will tell whether this regulation is here to stay or whether an alternative market regulation mechanism will take its place.

We recommend that all loan documents are reviewed by your lawyer prior to you signing so that you can discuss the terms of the loan and any risks associated with the lending structure.

New Rateable Values

Christchurch City Council has issued new rateable values for properties in Christchurch. These rateable values are effective from 1 July 2014.

Rateable values are based on a mass appraisal for city property sales by an independent valuer quotable value which is then audited by the office of the Valuer General. Revaluations are based on recent property sales for comparable properties in your area but do not represent the current market value of the property. This is standard practice throughout the country and revaluations are generally completed every three years.

A rateable value is made up of property's capital value and land value.

The value of improvements is determined by the difference between the capital value and the land value.

Rates essentially fund the balance of council costs once all other funding sources are taken into account.

It is important to note that the new valuations treat all properties as if all earthquake damage related repairs have been completed. Therefore if you have not attended to repairs on your property this will not be reflected in your rateable value.

If your home has been demolished, the rates will be based on the land value only until the house is rebuilt.

If the property is uninhabitable, the rateable value will be determined as if repairs had been completed but a rates remission may apply.

Key trends to emerge from the revaluations show:

  1. rateable values has tended to drop for bare TC3 land where specific foundations are required;
  2. rateable values in areas that have experienced an economic boom since the earthquakes have tended to increase; and
  3. rateable values of commercial property in the central city has tended dropped.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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