RBNZ proposes easing banks’ mortgage lending restrictions

Reserve Bank proposes easing LVR restrictions a little. Photo / Ted Baghurst

The Reserve Bank (RBNZ) is proposing to loosen loan-to-value ratio (LVR) restrictions, which would make it easier for prospective borrowers to get a mortgage.

Currently, up to 10 per cent of a bank’s new mortgage lending to owner-occupiers can go to borrowers with deposits of less than 20 per cent.

The RBNZ is proposing to give banks a little more leeway to lend to these relatively high-risk borrowers by increasing the “speed limit” to 15 per cent.

So up to 15 per cent of a bank’s new mortgage lending can go to borrowers with deposits of less than 20 per cent.

The rules are much stricter for investors.

Currently, up to 5 per cent of a bank’s new mortgage lending can go to investors with deposits of less than 40 per cent.

The RBNZ is proposing to keep the speed limit at 5 per cent but make this apply to borrowers with deposits of less than 35 per cent.

The RBNZ will spend the next two weeks consulting with banks on the proposed change, with the aim of implementing it on June 1.

RBNZ deputy governor Christian Hawkesby explained the RBNZ’s rationale.

“Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency.

“In particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see.”

Current LVR settings were put in place November 2021 when risks were elevated. This followed a period in 2020 and 2021 when they were removed completely.

The RBNZ said 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 noted national house prices have fallen towards a level that is more consistent with “medium-term fundamentals”.

So, while house prices may continue to fall, the probability of a further large correction in house prices has reduced.

Alongside this, lending conditions have tightened significantly as banks’ debt servicing assessments allow for higher interest rates.

The Herald on Tuesday reported on how banks are currently stress testing prospective mortgage holders at interest rates of between 8.5 and 8.75 per cent (or more), depending on the bank.

A RBNZ survey of banks published late-last week also showed banks continue to expect credit conditions to remain relatively tight over the next six months. Meanwhile demand for debt is at rock bottom.

The RBNZ will have more to say on the matter when it releases its Financial Stability Report on May 3.

It remains open to also imposing debt-to-income restrictions on banks’ mortgage lending next year.

Having just designed the tool that focuses on debt serviceability, the RBNZ is giving banks a year to get their systems ready to implement it, should the RBNZ deem this to be necessary.