A couple own their home and rent out a holiday bach to others for about six weeks a year. They want a loan secured on the bach. How does the Reserve Bank classify the bach for its LVR restrictions?
Correct Answer
D) Owner-occupied, as a secondary residence with only minimal rental income.
The Reserve Bank defines owner-occupied property as one the owner or their spouse occupies as a main or secondary residence. For a secondary residence, rental income must be minimal, and the Bank gives the example of a holiday house rented out for 6 weeks a year. Such a bach stays in the owner-occupied class, with its 80% LVR threshold.
Why This Is the Correct Answer
A secondary residence with minimal letting, like six weeks a year, keeps owner-occupied status.
Why the Other Options Are Wrong
Option A: Investment property, because any rental income makes a property an investment.
The Reserve Bank treats a secondary residence as owner-occupied where rental income is minimal, such as a holiday house let for about 6 weeks a year.
Option B: Investment property, because a person can have only one owner-occupied property.
The Reserve Bank's definition covers a main or a secondary residence of the owner or their spouse.
Option C: Neither category, because holiday homes are exempt from LVR restrictions altogether.
Holiday homes are not an exempt class; they are classified as owner-occupied or investment.
Background Knowledge for Finance
Source: https://www.rbnz.govt.nz/regulation-and-supervision/oversight-of-banks/standards-and-requirements-for-banks/macroprudential-policy/loan-to-value-ratio-restrictions
Exam Tip for Finance
Owner-occupied can mean a main or secondary residence; heavy letting of a secondary home moves it to investor.
Common Mistakes to Avoid on Finance Questions
- •Assuming any rental income at all turns a property into an investment property.
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When assessing a mortgage application, which factor is typically given the highest priority by New Zealand lenders?
James has been contributing to KiwiSaver for 4 years and wants to withdraw funds for his first home. His KiwiSaver balance is $45,000, but $15,000 consists of government contributions and employer matching. What is the maximum he can withdraw for his house deposit?
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- → What is the maximum amount a first home buyer can withdraw from their KiwiSaver account for a house deposit?
- → What does LVR stand for in New Zealand mortgage lending?
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- → A bank checks how much of a borrower's gross income would go on debt repayments. The borrower earns $80,000 a year, already pays $800 a month on other debts, and the new mortgage would cost $2,200 a month. What share of gross income would the repayments take?
- → Sarah earns $80,000 annually and wants to borrow $400,000. What is her debt-to-income ratio?
- → A property is valued at $600,000 and the buyer has a $100,000 deposit. What LVR would this loan represent?
- → Which of the following is NOT typically considered by banks when assessing lending criteria?
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- → Which type of mortgage allows borrowers to make additional payments that can be re-borrowed later?
- → A couple with a combined income of $120,000 wants to buy their first home for $650,000. They have a 15% deposit. What is their LVR?
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