Analysis: RBNZ plans removal of LVR restrictions to support housing market

By Sophia Rodrigues

The Reserve Bank of New Zealand is planning to remove loan-to-value ratio (LVR) restrictions for mortgages to support smooth credit flow in the economy and to prevent sharp fall in housing prices caused by the coronavirus pandemic.

The aim is also to remove any uncertainty for banks about any possible breach in LVR rules caused by the mortgage deferral scheme.

The RBNZ is issuing a consultation document that will be open for seven days and will implement the change based on the feedback it receives. The plan is to remove the restrictions for a period of one year until May 1 2020, and to review whether it will be needed after that.

The RBNZ first imposed LVR restrictions as part of macro-prudential policy in October 2013 to guard the economy from financial stability risks in the event of a sharp correction in housing prices. The policy was aimed at constraining excessive house price growth and household credit growth. Since then the policy has undergone changes four times with some tightening but more generally easing.

The current limits have been in place since January 2019 and it permits banks to make no more than 20% of their residential mortgage lending to owner-occupier borrowers with LVR above 80%. In case of investor mortgages, banks can make no more than 5% of lending to LVR above 70%.

In November, the RBNZ said there was a case for further easing in LVR restrictions based on the view that a slowing in house price inflation reduced the likelihood of a future sharp price fall, and as bank mortgage lending standards has tightened. However, given a resurgence in house price growth and early signs of easing in mortgage lending standards, the RBNZ decided it was not an appropriate time to ease.


In the current environment, one of the motivations for easing LVR is the possibility of mortgage loans entering the high LVR category due to the deferral of principal and interest payments for six months offered as part of pandemic relief package by the government and banks.

LVR restrictions apply for new lending with some specific exemptions like loans for construction, remediation, loan portability, bridging finance, refinancing etc.

It doesn’t apply to existing loans except when there is a mortgage top-up. A deferral of principal and interest payment for six months technically becomes a loan top-up after the end of the holiday period and could potentially push up the LVR for some mortgages.

According to latest data on LVR published by the RBNZ, just 0.5% of new investor mortgages had  LVR above 70% in February but with exemptions that proportion was 20.5%. This compares with 0.8% in January, and 0.4% in the same month in 2019.

In case of owner-occupier mortgages, 11.6% of new mortgages had LVR of 11.6% in February, down from 12.9% in January and 12.0% in the same month last year, but up from 8.3% in February 2018.

The likely easing in LVR is also to prevent sharp fall in house prices as household incomes fall and overall sentiment towards the housing market is expected to turn negative amid the coronavirus pandemic.

The latest date from REINZ showed a 0.7% m/m rise in the house price index in March and a 0.6% m/m drop in volume. On a seasonally adjusted basis, volumes fell 14% m/m.