On 30 April the RBNZ announced it was removing all LVR (Loan to Value Ratio) restrictions it had been imposing on NZ banks.
First, let’s refresh on what the restrictions were prior to this announcement:
RBNZ put “speed limits” on the amount of “low equity” housing lending a bank could enter into;
In this context, low equity were owner-occupiers with less than a 20% deposit and residential property investors with less than 30% deposit;
The speed limits meant a bank could not have more than 20% & 5% of its housing lending lent to low equity owner-occupiers and property investors respectively;
All of this is now gone but almost certainly not forever. Within the announcement, the RBNZ officially removed the restrictions for a 12-month period. The main reason for the removal was sighted as being a response to the potential impacts of the recent Mortgage Deferral Scheme. This scheme effectively allows borrowers to add interest payable on their loan to the principal sum owed for up to a period of 6 months. The impact this has in a market where property values are at best static will see the capitalised interest eroding a borrower’s equity level, which over time could have seen some of these borrowers fall into the low equity category and banks being inadvertently punished for participating in the government enforced scheme.
For bank customers, particularly those utilising the mortgage deferral scheme, removal of the restrictions will allow banks to provide you with more leniency in the short term. For prospective borrowers/property purchasers, this doesn’t mean the banks are going to start approving more low equity lending. To the contrary, I think whilst uncertainty is prevalent with respect to both property values and future income, the banks will tighten their risk
settings and new borrowers (particularly anyone other than owner-occupiers) will have more hoops to jump through to secure lending.
Written by James Macmillian, Director of Rede Business.