Reserve Bank prepares to axe loan-to-value restrictions for home-buyers

Tuesday, 21 April 2020

The move would allow people to get on to the property ladder with smaller deposits.

The Reserve Bank is proposing to remove loan-to-value ratio (LVR) restrictions that limit how much mortgage debt house-buyers can take on.

The change could mean home buyers could get on to the property ladder with a smaller deposit.

The central bank said the plan was a response to the economic downturn caused by the Covid-19 pandemic.

LVR restrictions have been in place since 2013, when concerns grew about an 'overheating' housing market.

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At present, banks are allowed to lend no more than 20 per cent of their new loans to owner-occupiers with equity or a deposit of less than 20 per cent of the value of the house they want to buy. They can lend no more than 5 per cent to investors with equity of less than 30 per cent.

Exemptions are made for new builds and people buying with Government-backed First Home Loans.

Reserve Bank deputy governor Geoff Bascand said removing the restrictions now would help banks keep lending to customers, including to home owners who had requested mortgage 'holidays'.

The Reserve Bank will spend just seven days seeking feedback and said a decision would be made 'promptly after that'.

'If the decision is made to remove the restrictions, the Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the Covid-19 pandemic becomes clearer,' the Reserve Bank said in a statement.

'After that period, we will review whether to reinstate LVR restrictions.

'This provides banks and customers certainty that no further changes to LVR requirements will be made for at least one year,' it said.

Real Estate Institute chief executive Bindi Norwell is feeling optimistic.

The suggestion was welcomed by New Zealand Bankers' Association chief executive Roger Beaumont.

'We welcome any moves to further help our customers impacted by the global pandemic. This proposal lines up with other Reserve Bank initiatives to free up the financial system at this extraordinary time.

'This proposal would also add to the range of support our banks are already offering affected customers to help them get through. For example, banks have to date allowed around 100,000 customers reduce repayments on loans worth $33 billion, and completely defer repayments on loans worth $17 billion.'

ASB chief economist Nick Tuffley said the restrictions were introduced in an environment that was the opposite of the current one now.

'There's no real need for them from the point of view of trying to contain a housing market overheating.'

He said the impact of removing them was likely to be small because the amount of low-equity lending being done was not near the existing limits.

Brokers reported that the ability to service a loan was often a bigger factor in a loan application being denied than lack of equity.

'But there's no need for them to be there so they can be taken away. We're likely to see credit growth slow. We are not going to see an overheating housing market over the next year.'

Gareth Kiernan, chief forecaster at Infometrics, said banks seemed reluctant to lend to people with small deposits at present anyway and were not chasing new lending or increasing the size of borrowers' loans. But he said removing the restrictions would help when the appetite for lending returned.

'So when the market does improve, and it could be some time away, there is no artificial impediment to things.'

NZIER principal economist Christina Leung said deterioration in the labour market was likely to flow through to weaker housing market activity.

'So removing the LVR restrictions for at least 12 months should help to offset some of the weaker demand resulting from the Covid-19 outbreak.

'Housing demand had actually still been robust even up to the alert level four shutdown, and with the introduction of loan payment deferrals this will reduce the likelihood of forced sales and hence any sharp decline in house prices. Removing the LVR restrictions is another use of macroprudential policy in supporting financial stability.'

Real Estate Institute chief executive Bindi Norwell said it should help first-home buyers.

'First-time buyers have found themselves in a really difficult situation during Covid-19 with the portion of their KiwiSaver fund able to be used for a first home purchase being at a much lower value than many had expected. Therefore, the proposal by the Reserve Bank to remove LVRs, albeit for a limited period of time, will go a long way towards helping first-time buyers to get in to the market.

'It is interesting to note that the Reserve Bank's proposal doesn't appear to make any distinction between first time buyers, owner occupiers or investors. This is welcome news as Covid-19 is negatively impacting so many people from a financial perspective around the country.'

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