RBNZ Removes LVR Restrictions to Support Mortgage Deferral Scheme, Hsg Mkt

By Sophia Rodrigues

The Reserve Bank of New Zealand has removed the loan-to-value ratio (LVR) restrictions for mortgages to ensure they would not be an impediment in the implementation of the mortgage deferral scheme, for both borrowers and lenders.

The restrictions have also been removed to support credit flow in the economy and prevent sharp fall in housing prices due to the impact of the coronavirus.

The RBNZ announced a proposal to remove restrictions on April 21 and has moved swiftly to implement it after a short consultation period.

The restrictions have been removed for a period of 12 months and any decision to continue or end will be taken just prior to the end of the 12-month period. It is effective May 1.

“By significantly improving the equity positions of mortgage borrowers, it is likely that a significantly smaller number of borrowers will have to sell their house or default on their mortgage as a result of the current economic shock. This reduces the likelihood of a large and disorderly fall in house prices as a result of large numbers of forced house sales,” the RBNZ said.

“This action will also avoid any uncertainty around the implications of LVR limits from the mortgage deferral scheme,” the RBNZ said.

The RBNZ noted some concerns in the submissions that removing the restriction would weaken the resilience of the financial system. But its own view is that it would support financial stability because it removes one potential obstacle to the flow of credit to the economy.

“The removal of the LVR restrictions also removes the risk that an increase in LVRs might discourage banks from extending mortgage deferrals to households with temporary liquidity problems, if banks perceive the LVR restrictions to be an impediment,” the RBNZ said.

The RBNZ acknowledged there are other risks associated with removing the restriction, including increases in household debt and the possible distributional impacts. But it judged these risks to be low in the current environment because banks are unlikely to have a large appetite for providing loans to high risk borrowers.


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%.

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.

--Contact: sophia@centralbankintel.com