RBNZ proposes to ease home lending restrictions

The Reserve Bank of New Zealand (RBNZ) has announced it will increase the limit on loans to borrowers with an LVR above 80 per cent from 10 per cent to 15 per cent of total new bank lending to owner-occupiers.

RBNZ put mortgage loan-to-value ratio restrictions in place in March 2021 but said the restrictions had “built resilience in the financial system”, which has been evident in the past year as house prices have fallen without widespread impacts on financial stability.

LVR restrictions are in place to promote financial stability by limiting high-risk mortgage lending by increasing the resilience of the banking system and households through reducing the impact and severity of housing market corrections.

Under the new rules, which are due to take effect from 1 June 2023, the limit on loans to borrowers with an LVR above 80 per cent (with a deposit above 20 per cent) will increase from 10 per cent to 15 per cent of total new bank lending to owner-occupier lending.

For investor lending, banks will have a 5 per cent limit of total new investor loans with LVRs above 65 per cent, up from 60 per cent.

RBNZ deputy governor Christian Hawkesby said the risks to financial stability posed by high LVR lending have reduced, warranting the current restrictions as unnecessary.

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

It comes as the Reserve Bank lifted the official cash rate by a further 50 bps to 5.25 per cent, at a time when national house prices have fallen.

The RBNZ noted given the probability of a further large correction in house prices has reduced and lending conditions have tightened significantly (as banks’ debt servicing assessments allow for higher interest rates), it is consulting the changes over the next two weeks with the banks.

High DTIs fall in Australia

While the Australian Prudential Regulation Authority (APRA) has not imposed LVR, it reduced the amount of lending being done at high debt-to-income ratios and welcomed the data that showed high DTIs were falling at the banks.  

On the back of rising interest rates and falling house prices, high DTI exposures had reduced alongside borrower appetite. 

APRA deems mortgages with a DTI of six or more to be “riskier” and has been keeping a close eye on DTI after they reached a record-high level of 24.4 per cent in the December 2021 quarter.

[Related: RBNZ lifts official cash rate by 50 bps]