RBNZ confirms easing of mortgage lending restrictions

More prospective homeowners to be eligible for a mortgage with a deposit of less than 20 per cent. Photo / Fiona Goodall

The Reserve Bank (RBNZ) is pushing ahead with plans to ease mortgage lending restrictions imposed on banks.

From June 1, loan-to-value ratio (LVR) restrictions will be loosened to enable more owner-occupiers to get mortgages with deposits of less than 20 per cent.

Currently, 10 per cent of a bank’s new mortgage lending can go to these higher-risk borrowers with small deposits. This cap will be lifted to 15 per cent.

The RBNZ will also lower the minimum deposit most investors need to have, from 40 per cent to 35 per cent, while maintaining the 5 per cent cap banks have to lend to investors who don’t meet the threshold.

In both cases, exemptions apply, including for those borrowing for a new build or to do repairs.

RBNZ deputy governor Christian Hawkesby said “risks to financial stability posed by high-LVR lending have reduced to a level where we believe the current restrictions may be unnecessarily reducing efficiency”.

The RBNZ noted that the current settings, which are the tightest they’ve ever been, were implemented in November 2021 when “risks were elevated”.

“The restrictions built resilience in the financial system, which has been evident in the past year as house prices have fallen without widespread impacts to financial stability,” it said.

“LVR restrictions promote financial stability by limiting high-risk mortgage lending. This is done with the aim of reducing the impact and severity of housing market corrections by increasing the resilience of the banking system and households.”

The RBNZ made its decision to tighten settings after flagging the change in April and briefly consulting banks.

Speaking to the Herald, Hawkesby said the RBNZ would keep looking at the data to see if there was evidence LVR settings could be further loosened to pre-Covid levels.

He said those settings were typically reviewed every six to 12 months.

Hawkesby said that if the RBNZ imposed debt-to-income restrictions, it would also review LVR settings to ensure the rules were appropriate in combination.

The RBNZ has given banks until April next year to ready their systems for the possible introduction of debt-to-income restrictions, which would limit the amount of lending banks could issue to borrowers seeking a lot of debt compared to their incomes.