Reserve Bank reinstates LVR restrictions to pre-COVID-19 levels

by Roxanne Libatique10 Feb 2021

The Reserve Bank of New Zealand (RBNZ) will keep its promise that it will reinstate loan-to-value ratio (LVR) restrictions this year to reduce the risks to financial stability caused by high-risk mortgage lending.

RBNZ deputy governor Geoff Bascand confirmed that the RBNZ will reinstate LVR restrictions on March 01 at the same level as before COVID-19, with a further tightening of investors’ restrictions taking effect on May 01. Mortgage lenders’ operational capabilities necessitated the two-step process.

The central bank removed LVR restrictions last year in response to the impact of the COVID-19 pandemic, allowing the industry to implement policies promoting cash flow and confidence.

“Since then, in part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace,” Bascand said.

“We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.”

Bascand noted the growing number of highly indebted borrowers financially vulnerable to house price corrections and disruptions to their ability to service debt, with highly leveraged property owners more prone to rapid “fire sales” that potentially amplify any downturn.

“These financial stability risks exceed the situation at the time of the Bank’s December LVR consultation, resulting in more restrictive policy settings being decided on,” he continued.

From March 01, LVR restrictions for owner-occupiers will be reinstated to a maximum of 20% of new lending at LVRs above 80%. LVR restrictions for investors will also be reinstated to a maximum of 5% of new lending at LVRs above 70%.

From May 01, LVR restrictions for owner-occupiers will remain at a maximum of 20% of new lending at LVRs above 80%. Meanwhile, LVR restrictions for investors will be further raised to a maximum of 5% of new lending at LVRs above 60%.

“We expect mortgage lenders to respect the 60/5 investor restrictions immediately with all new loan approvals to ensure that their mortgage lending is consistent with our policy decision,” Bascand said.

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