It's now known in banking circles as the "bifurcation" of the mortgage market. It describes the way banks are dealing with home buyers after the Reserve Bank imposed its high loan-to-value ratio (LVR) limit from October 1.

The market is split into two. On one side are the high-LVR borrowers who want to borrow more than 80 per cent of the value of the property. They are often first-home buyers and banks have mostly stopped new lending to them or they risk breaching licence conditions. Banks have increased interest rates for more than 80 per cent of borrowers, and toughened lending criteria to exclude those on lower incomes.

But banks love buyers who want to borrow less than 80 per cent of the value of the house and have ramped up marketing to them, offering fixed-mortgage discounts and freebies such as iPads.

BNZ has even offered them a credit card with an interest rate fixed at the same level as its standard floating mortgage rate, 5.99 per cent, rather than at 19.95 per cent.


Banks are ramping up lending to this side of the market for two reasons: it is unrestricted and banks make more profits by lending more.

Secondly, increasing lending to the sub-80 per cent category gives them more room to lend more above 80 per cent once the backlog of pre-October 1 approvals are cleared.

Rental property investors are well placed to join the sub-80 per cent club; they are often "watering down" equity in a house they already own to buy more properties, so they can just pull out 20 per cent and borrow the 80 per cent.

Last week, the Reserve Bank released the first figures showing the effect of the high-LVR policy on the market. High-LVR lending almost halved between September and November, and now sits just above the 10 per cent limit it set for the first six months. Banks moved remarkably fast to get there, indicating they have virtually stopped all new lending while they work through pre-approvals.

But sub-80 per cent lending has risen by $739 million to $3.899 billion, more than off-setting the drop in high-LVR lending.

It's early days, but the high-LVR policy is struggling to contain house-price inflation or lending growth. It has, however, cleared first-home buyers from the market and made it easier and cheaper for rental property investors.

It also appears to have delivered a de facto easing of monetary policy at a time economists say growth is accelerating to 5 per cent. So, what was the point of that again?