RBNZ Planning to Bring Back High LVR Mortgage Rules As High Risk Loans Grow

• Published on
• 11 Nov 2020, 09:07 AM

By Sophia Rodrigues

The Reserve Bank of New Zealand is planning to bring back loan-to-value ratio (LVR) restrictions for mortgages earlier than expected to curb swift growth in higher-risk investor lending.

In a statement Wednesday, announced a few hours prior to the quarterly Monetary Policy Statement, the RBNZ said it “will consult about re-instating the restrictions we had in place pre-COVID, which limited the amount of high-risk lending banks could make.”

The consultation date will be announced on November 25 when the RBNZ is due to publish the twice-yearly Financial Stability Report and the plan is to re-instate the LVR restrictions with effect from March 1, 2021.

The likely March date is at least two months earlier than the commitment provided by the RBNZ when it announced removal of LVR restrictions from May 1, saying the restrictions are completely eased for the next 12 months.

At the time of removal, the LVR limits meant banks could make maximum 20% of their residential mortgage lending to owner-occupier borrowers with LVR above 80%. In case of investor mortgages, banks could make no more than 5% of investor lending with LVR above 70%.

Back then, the restrictions were removed to support smooth credit flow in the economy and to prevent sharp fall in housing prices caused by the coronavirus pandemic.  It was also aimed at removing any uncertainty for banks about any possible breach in LVR rules caused by the mortgage deferral scheme.

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 five times with some tightening but more generally easing.

According to latest data on LVR published by the RBNZ, high LVR new investor mortgage commitments saw an increase of 24.3% in September, up from 10.3% in August. The RBNZ noted that monthly new mortgage commitments with high LVR (above 80%) has been increasing since the restrictions were removed in May.

--Contact: sophia@centralbankintel.com