Reserve Bank to scrap loan-to-value ratio for a year

Loan-to-value ratio will be dropped for a year.
Loan-to-value ratio will be dropped for a year. Photo credit: Getty

It will now be easier to get a bank loan to buy a house, with the removal of loan-to-value ratio (LVR) restrictions by the Reserve Bank, effective tomorrow.

Restrictions were imposed in October 2013, meaning no more than 10 percent of banks' new mortgages by value could be to people with deposits of less than 20 percent.

With inflating house prices, the requirement for buyers to stump up the 20 percent deposit has been prohibitive.

Reserve Bank deputy governor Geoff Bascand said it received more than 70 submissions on the proposed changes.

"The feedback raised a number of valid points and concerns which were all carefully considered.

Submitters against the removal of the LVR policy were concerned about potential adverse impacts on financial stability, such as the risk of bank failure.

They also noted the economy had weakened and job security had reduced, and the ability of people to service a mortgage would likely decline in the coming months.

"Given the current uncertainty around the economic outlook, the Reserve Bank considers that it is unlikely that banks will weaken lending standards to high risk borrowers. The more likely risk is that banks are overly cautious with lending to credit-worthy borrowers," Bascand said.

"Rather, removing LVR restrictions now supports financial stability by removing one potential obstacle to the flow of credit in the economy, helping to soften the downturn."

The policy would be reviewed in 12 months.