New controls on mortgage lending at least a year away

Wednesday, 27 April 2022

Homes used to cost a lot less, but in previous decades home loan interest rates were much higher. Home loans rates are however on the rise as the Reserve Bank Te Pūtea Matua has been raising the official cash rate to fight inflation.

Additional mortgage lending controls designed to prevent home buyers from getting in over their heads in debt look likely to be more than a year away.

The Reserve Bank has been holding consultations on introducing debt-to-income restrictions that would cap how much home buyers could borrow in relation to their incomes.

The controls would complement existing loan-to-value rules that limit how much banks can lend home-buyers in proportion to the price of the homes they are buying.

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Both controls have the broad effect of requiring home buyers to have higher deposits or to pay less for houses, but can impact people to different degrees, depending on their financial circumstances, still with a lot of potential for overlap.

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The Reserve Bank has previously suggested it could cap the amount borrowers could spend on a home to seven times their gross incomes.

But with house prices now in retreat and mortgage rates rising, the urgency for new controls on mortgage lending appears to have reduced.

The Reserve Bank expects to see a reduction in risky lending as interest rates rise, but is pressing ahead with plans for new controls on mortgage lending next year.

The Reserve Bank said it expected to see a reduction in new lending at high debt-to-income (DTI) ratios in the coming months anyway, as banks increase the hypothetical interest rates they use when calculating borrowers’ ability to service their loans in more adverse future circumstances.

But it said DTI controls were still an important additional tool for “reducing financial stability risks and supporting house price sustainability” and would fill a gap not covered by existing regulations.

Deputy governor Christian Hawkesby said the central bank planned to have a framework for DTI controls in place by late this year, “so that restrictions could be introduced by mid-2023 if required”.

The Reserve Bank had previously said it expected banks to be ready to implement regulated DTI limits by no later than at the end of this year.

It indicated it did not currently see a need for an interim measure that would impose a floor on the hypothetical interest rates banks use when testing borrowers’ ability to withstand future rate rises.

But it was monitoring the situation closely “and do not rule out imposing a test rate floor if financial stability risks warrant it”, it said.

Finance Minister Grant Robertson has instructed the Reserve Bank to have regard to the impact new controls could have in making it harder for first home-buyers to finance house purchases.

Hawkesby indicated imposing caps on mortgage debt as a proportion of borrowers’ income would have less of an effect on first home buyers than setting a floor on the hypothetical interest rates used by the banks’ in their serviceability tests.

That was because investors tended to borrow at higher DTIs than other borrowers, he said.

The Reserve Bank has also previously suggested that DTI controls could benefit first-home buyers overall by “supporting sustainable house prices and dampening investor demand”.