Reserve Bank to remove loan-to-value restrictions for housebuyers

The Reserve Bank has proposed that loan-to-value ratio (LVR) restrictions that limit the amount of mortgage borrowing for home buyers be removed.

Put forward for an initial period of 12 months, the central bank said the proposal is in response to the economic downturn caused by COVID-19. 

Although new mortgages would continue to be assessed on level of savings and ability to make repayments, removing LVR restrictions would mean one less hurdle for first-home buyers.

Reserve Bank deputy governor Geoff Bascand ​said removing the restrictions now would help banks keep lending to customers, including existing borrowers asking for a mortgage holiday.

"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," Bascand said.

Under current LVR restrictions, up to 20 percent of new bank loans can be provided to residential owner-occupiers with a deposit of less than 20 percent of the home's value. Up to 5 percent of loans can be provided to residential investors who have a deposit (or equity) less than 30 percent.

ASB chief economist Nick Tuffley, said that removing the restrictions is more relevant to new borrowers as it means the would be no arbitrary restrictions coming from the Reserve Bank on what they can borrow.

"[The lending decision] will come down to the normal credit criteria, which will be how much equity will you be carrying into it and what's your debt-servicing capability," Tuffley said.

As LVRs have been done on a historical basis, removing the restriction is unlikely to affect existing borrowers, unless they go through a 'credit event' where the value of the asset (home) is reassessed.

"A lot of people [existing borrowers] have been sitting on a home for a bit, so the house has gone up in value anyway," Tuffley added.

REINZ chief executive Bindi Norwell, said that following the introduction of LVRs, as house price growth had outpaced the ability to save, many first-home buyers had found it difficult to save the minimum 20 percent deposit.

"[In] places such as Auckland, it can take in excess of 15 years for a couple on an average salary to save a 20 percent deposit," Norwell said.

"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 onto the market."

The central bank said it will consult with industry stakeholders over seven days and gather feedback before announcing the decision. If the proposal goes ahead, it would review whether to reinstate the restrictions after 12 months.