LVR Exemption

Reserve Bank issues LVR exemption for construction

Date 28 March 2014

The Reserve Bank today published revised rules that exempt construction loans from the Loan-to-Value Ratio (LVR) ‘speed limit’ introduced last October.

The exemption for construction loans was announced on 10 December last year and is backdated to 1 October 2013.  After the exemption was announced, the Reserve Bank formally consulted with the banking and building industries on proposed wording for the exemption.

Submissions generally supported the intent of the construction exemption, and provided clarity around language used to define the limits of the exemption.

After considering feedback about the definition of construction loans, the Reserve Bank has altered the wording of the exemption to allow preparation of the site, such as clearing or earthworks, and putting in place the building’s substructure and framing”   before the borrower commits to the purchase of a dwelling that is being built.

The construction loan exemption means that low-deposit lending is not included in a lender’s 10 percent speed limit if the lending is used to finance the construction of a new house or apartment.

The LVR speed limit aims to reduce the threat to financial stability created by rapid growth in house prices. The exemption aims to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market.