Westpac's New Zealand unit is cutting interest-only lending terms to a maximum of five years, in a market where investors are the driving force.
Interest-only loans are often used by property investors who meet the interest repayments and leave the principal untouched on the expectation they can pocket a capital gain on the sale of a house.
Westpac has previously allowed terms of up to 15 years but has cut that by two-thirds in the latest response to a build-up of property investor activity, which now accounts for about 40 per cent of all new lending.
Simon Power, general manager of consumer bank and wealth at Westpac NZ, said there were two elements to the move - making sure the bank's lending and risk profile reflected the market activity, and giving borrowers a chance to check their repayment plans.
"There's a risk lens, but there's also a customer obligation lens in making sure people are comfortable with their own capacity," Power said.
"We're looking to make sure the settings are right."
Property investors have come under scrutiny in recent months as the primary drivers of accelerating house prices, taking advantage of historically low interest rates. While that was initially concentrated in Auckland, it has since spilled over into other regions.
The Reserve Bank last week said it could roll out its existing restriction on highly leveraged lending on Auckland residential property investors across the country by the end of the year, something the Bankers' Association has said would be reasonably simple given banks already have the systems in place.
Westpac was one of several banks which stopped lending to non-resident borrowers with overseas income last month, and Bankers' Association chief Karen Scott-Howman last week said lenders were already responding to signals in the market and from the Reserve Bank.
Reserve Bank figures show interest-only mortgages accounted for about 41 per cent of all new lending in May, up from 38 per cent in January when it first started collecting the data. Of existing home loans, interest-only mortgages totalled $60.82 billion as at March 31, or 28 per cent of total loans.
Westpac's Power said the residential lending market was still very competitive, and while it wasn't showing signs of a deterioration, "we've got to be prudent".
Westpac NZ's gross residential loan book was valued at $43.46b as at March 31.