Reserve Bank removes LVR restrictions

by Ksenia Stepanova01 May 2020

The Reserve Bank of New Zealand has scrapped LVR restrictions for twelve months, meaning banks now have no limit on the amount of high-LVR lending they can offer. The change is effective from 1 May.

It says the decision was made so that LVR restrictions didn’t have “an undue impact” on borrowers or lenders as part of the six month mortgage holiday scheme offered to struggling homeowners. Deputy Governor Geoff Bascand said the Reserve Bank received a high number of submissions from the industry, and a decision was reached following a Regulatory Impact Assessment.

“The Reserve Bank received more than 70 submissions from members of the public and industry, expressing a wide range of views,” Bascand said.

“The Reserve Bank also directly approached a number of NGOs - including Māori and Pasifika groups to make them aware of the proposed changes, and to provide them a chance to provide feedback on the proposals.”

Bascand noted that the submissions offered a “mixed” view on the proposal, but all local banks were in favour of removing LVR restrictions as they would help them support customers through Covid-19. Other submissions recognised that removing the restrictions could pave the way for more first home buyers to get onto the property ladder.

The submissions against the proposal expressed concern about potential negative impacts on bank stability, and an increased risk of bank failure. They also noted that customers’ ability to maintain a mortgage will likely decline over the coming months.

However, Bascand says he is confident that banks will not drop their lending standards or accumulate a high amount of risky loans.

“Given the current uncertainty around the economic outlook, the Reserve Bank considers that it is unlikely that banks will weaken lending standards to high risk borrowers,” Bascand said. “The more likely risk is that banks are overly cautious with lending to credit-worthy borrowers.”

“The Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the COVID-19 pandemic becomes clearer,” he concluded.

“While we’ve eased the restrictions completely for the next twelve months, we will review the most appropriate setting for LVRs in a year’s time.”

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