The Reserve Bank of New Zealand has eased loan-to-value ratio restrictions in response to lowering risks to New Zealand’s financial system.
New restrictions on mortgage loans, which will come into effect on 1 January 2019, are the following:
- Up to 20 percent (increased from 15 percent) of new mortgage loans to owner occupiers can have deposits of less than 20 percent.
- Up to 5 percent of new mortgage loans to property investors can have deposits of less than 30 percent (lowered from 35 percent).
According to Reserve Bank governor Adrian Orr, risks to the financial system have ‘eased over the past six months,’ though some households remain vulnerable to financial shocks due to large amounts of mortgage debt. Nonetheless, mortgage credit growth and house price inflation have eased to a more sustainable rate, which has reduced risk for banks extending new mortgages.
“In response to this, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans,” Orr stated. “If banks’ lending standards are maintained, we expect to further ease LVR restrictions over the next few years.”
The Reserve Bank says the LVR restrictions are designed to be flexible in response to the level of risk, and it is aware that this latest round of easing may fuel demand and contribute to house price inflation.
“We know that banks have made full use of the increased buffer that we offered earlier this year, and high-LVR lending expanded by 4-5 points,” Reserve Bank deputy governor and head of financial stability Geoff Bascand told today’s Wellington press conference.
“We know that it has contributed to supporting credit growth overall,” Orr added.
“Eased LVR restrictions have been a factor in increasing demand, and that has probably had some impact on price. We expect that this latest round will also have some impact, but not at any level that causes us concern.
“The LVR restrictions are just one tool, and it’s a cyclical tool around a specific purpose – the sharp edges around new lending.”
The Reserve Bank says that LVRs are here to stay for the long term, and that it is not attempting to target house price inflation with changes to restrictions. The domestic banking system looks ‘sound at present,’ and the Reserve Bank will be using the period of calm to reassess whether it has sufficient capital to weather potential future shocks.