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RBNZ to remove LVR restrictions on bank mortgages

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The Reserve Bank is giving banks seven days notice that it plans to remove loan-to-value ratio (LVR) restrictions on their residential mortgages for at least a year.

This decision follows the economic downturn caused by the COVID-19 pandemic. LVR restrictions are limits placed on banks to reduce the amount of low-deposit mortgages they can provide. (Details on where the limits are set are at the bottom of this article).

The Reserve Bank says the LVR restrictions are aimed at reducing risks to financial stability from a severe correction in house prices. The restrictions were introduced in October 2013 in response to high levels of high-ratio mortgages, with policy parameters since adjusted as risks evolved.

“Current economic conditions resulting from the COVID-19 crisis have caused the Reserve Bank to consider removing LVR restrictions, given the counter-cyclical nature of LVR policy. This action will also avoid any uncertainty about the implications of LVR limits. of the Mortgage Deferral Program. It is important that banks continue to provide support to borrowers during these extraordinary times,” the Reserve Bank said in a letter to the banks.

“The Reserve Bank intends to remove LVR restrictions for a period of one year, until May 1, 2021. We have not yet determined what, if any, LVR limits will be required for the future. This will be reviewed in more detail before the end of the 12 months, and will be consulted as necessary.”

Reserve Bank Deputy Governor and Chief Financial Stability Officer Geoff Bascand said that, as is normal for changes to macroprudential measures, the regulator consults with banks on its proposal, for seven days.

“Comments will be collected from industry stakeholders during this period and a decision will be made quickly thereafter,” Bascand said.

“The change, if made, will be made via an amendment to the bank’s registration requirements. If the decision is made to remove the restrictions, the Reserve Bank will monitor lending activity and feedback from banks of detail over the next 12 months, as the economic impact of the COVID-19 pandemic becomes clearer. After this period, we will review whether to reinstate LVR restrictions. This gives banks and customers certainty that no further changes to the LVR requirements will be made for at least one year.

LVR restrictions apply to new high LVR loans, not retrospectively to existing loans. Existing borrowers are only affected if they wish to take out an additional loan.

The chart below is from the Reserve Bank’s May 2019 Financial Stability Report. At that time, the Reserve Bank said LVR restrictions had been in place since 2013 to address risks associated with high household indebtedness and rising house prices, and had made households and banks more resilient to financial shocks.

Details of current LVR restrictions, as established by the Reserve Bank, are below.

Investor loans – 30% deposit / 5% of investor loans

LVR loan restrictions are stricter for investor loans due to the higher risks associated with this type of loan. The current policy classifies investor loans as high LVR loans if they represent more than 70% of the value of the property and limits high LVR loans to no more than 5% of a bank’s total new investor loans. .

Homeowner loans – 20% down payment / 20% homeowner loan

This category of loan is for loans secured by owner-occupied property. The current policy classifies homeowner loans as high LVR if they represent more than 80% of the property’s value, and limits high LVR loans to no more than 20% of total new homeowner loans. a bank.

Special cases

There are certain exemptions for borrowing to build a new home, for non-routine repair work (e.g. repairing leaky homes) on existing properties, bridge financing, refinancing of existing loans, transfer of loans from one property to another (provided the total value of the loan does not increase) and loans made under Housing New Zealand’s mortgage insurance scheme (including welcome home loans). The building exemption covers any loan for the purchase of residential property under the government’s Kiwibuild program. In addition, borrowers with owner-occupied collateral and investment property can use the combined collateral waiver to obtain financing for up to 70% of the value of the investment properties and 80% on their owner-occupied property.