RBNZ tightens restrictions on loan-to-value ratio

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The LVR restrictions are intended to mitigate the economic and financial stability risks associated with a potential future correction in the housing market.

The Reserve Bank of New Zealand (RBNZ) has announced that it will implement its proposal to tighten loan-to-value ratio (LVR) restrictions on homeowner loans to reduce risky mortgages.

From November 1, 2021, the RBNZ will limit the amount banks can lend above an LVR from 80% to 10% of all new homeowner loans, up from 20% currently.

The RBNZ launched a consultation paper proposing the change earlier this month, after observing that despite previous adjustments to LVR restrictions, house prices remained unsustainable and the risks of a housing market correction continued to rise. ” increase, increasing the risks to economic and financial stability.

“While the financial system remains strong and banks are well capitalized, we are concerned about the potential future risks to financial stability of allowing this higher risk borrowing to continue at its current rate,” RBNZ said. in a regulatory impact statement, published here.

Submissions to the industry representative consultation were broadly in favor of tightening LVR restrictions, with respondents recognizing the need to control house price inflation and mitigate potential risks to financial stability, RBNZ said. .

However, comments from members of the public were mixed, with some submissions questioning the need for additional restrictions or arguing for other policies to protect the financial system.

A summary of the submissions is published here.

The consultation had proposed to implement the new LVR parameters from October 1, but the RBNZ decided to postpone the implementation to November 1 in light of the Covid-19-related disruptions, which delayed the completion of the housing purchases already approved by banks.

The policy change will take effect by modifying the Bank Registration Conditions (CoR).





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