Reserve Bank considers tighter mortgage lending standards

The Reserve Bank of New Zealand – Te Pūtea Matua – will soon begin consulting on ways to tighten mortgage lending standards, Deputy Governor and General Manager for Financial Stability Geoff Bascand says.

The action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance.

“The updated MoU adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks,” Mr Bascand says.

“We are focussed on ensuring borrowers are resilient to a range of future economic and financial conditions. We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs.

“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage,” Mr Bascand says.

“We’ve already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”

In order to prevent this problem from getting worse, we will be consulting on a proposal to further reduce the amount of high LVR lending to owner-occupiers. We propose to restrict the amount of lending banks can do above an LVR of 80 percent to 10 percent of all new loans, down from 20 percent at present. We will begin consulting on this change later this month with a view to introducing it from 1 October 2021.

“We also intend to consult in October on implementing Debt-to-Income (DTI) restrictions and/or interest rate floors in an effort to provide further comfort that borrowing is sustainable. Introducing DTIs will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly.

“Consultation will be focused on operational feasibility and possible calibration of these tools, including their impacts on investors and first home buyers,” Mr Bascand says.

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