Mortgage lending recovers, banks remain ultra-cautious

Despite the removal of LVRs, banks remain cautious in the lending practices. Photo / Getty Images

Mortgage lending recovered in May after shrinking in April for the first time on record, but mortgage brokers say the banks are still taking an ultra-conservative stance on lending criteria.

Reserve Bank data released late yesterday showed mortgage lending in May totalled $4.32 billion, up from $2.75 billion in April but still down from $6.18 billion in March.

The May total is still the lowest level of lending, apart from April, since January 2019 when mortgage lending was $4.05 billion, and was well down on the $6.47 billion lent in May last year.

New Zealand was in alert level 4 lockdown until April 27 to combat the spread of covid-19 and didn't move to the less restrictive alert level 2 until May 13, while all but border restrictions were lifted from June 8.

Both the government and the RBNZ have been urging banks to do their part in supporting NZ's economic recovery and that's one reason why the RBNZ tried to pave the way to more lending by scrapping its loan-to-valuation restrictions as the nation headed into lockdown.

Zero impact

But economist Tony Alexander said his survey of mortgage advisors found the impact of removing the LVRs has been almost zero.

"Banks have yet to pass on the removal of LVRs, though one or two cracks are appearing just this past week, and they are requiring substantial proof of post-lockdown incomes," Alexander said.

"They are also actively discriminating against borrowers working in certain industries most heavily affected by the virus and border closure," he said.

"And banks are still taking a long time to process mortgage applications, typically out toward 10 to 12 days and sometimes longer."

Alexander said the banks have yet to reduce the interest rates they use for testing borrowers' debt servicing ability – these rates typically range from 6.5 per cent to 7.5 per cent when actual mortgage rates are less than half that.

For example, the most popular term, two-year fixed mortgage rates offered by the mainstream mortgage lending banks range from 2.69 per cent to 2.75 per cent for borrowers with at least a 20 per cent deposit.

Queue building

While such banking practices might put downward pressure on house prices in the short-term, "it means that the queue of people wanting to buy and as yet unable to do so is growing longer and longer by the week," Alexander said.

"When the banks do eventually ease up their lending criteria, there could be some extra upward pressure on house prices."

The RBNZ data showed:

• 18.6 per cent of new lending was to first-home buyers, up from 17.8 per cent in May last year
• 20.7 per cent was to property investors, up from 17.6 per cent in May last year
• Just under 30 per cent of total mortgage lending was on interest-only payment terms, up from 27.9 per cent in May last year
• 11.9 per cent was to those with deposits less than 20 per cent, up from 10.9 per cent in May last year and 8.4 per cent in May 2018
• only $5 million of high LVR lending was to property investors, the same as in May last year, but $134 million was to investors with less than 30 per cent deposits, down from $152 million in May last year.
• Alexander said banks aren't likely to loosen the reins on lending until they're confident that the economic outlook is better.

"For the moment, their requirement to undertake responsible lending means they simply cannot open the spigots. They cannot say that our economy is improving sustainably as yet and that the worst is over for most people," he said.

"And they can't yet have confidence that house prices are not going to fall away."

That last point is crucial for the banks with their mortgage lending accounting for about 55 per cent of their balance sheets.

Alexander suggested that the government's failure to control the borders could be contributing to banks' lack of confidence.

"If anything, the failures of the public servants in recent weeks have delayed our economic recovery and will have made banks even less willing to lend."

- BusinessDesk