Reserve Bank to tighten loan-to-value restrictions, admits that makes it harder for first-home buyers to get on the ladder

The Reserve Bank has slashed the amount of lending banks can do to big borrowers in half, tightening loan-to-value restrictions (LVRs). 

From November 1 only 10 percent of a bank's lending can go to owner-occupiers with a deposit of 20 percent or less. At present, 20 percent of lending can go towards low-deposit borrowers. 

The reason? Unsustainable growth in house prices pose a threat to the stability of the economy.

"Despite previous adjustments to LVR restrictions, house prices remained unsustainable and the risks of a housing market correction had continued to rise, increasing risks to economic and financial stability," Deputy Governor Geoff Bascand said on Thursday.

"Restricting high risk lending will help prevent these problems getting worse."

Some experts have said the Reserve Bank itself is to blame for skyrocketing house prices, after it slashed the official cash rate (OCR) in March 2020 in order to stimulate the economy as COVID-19 spread around the world. They were expected to rise in August before the latest lockdown was ordered.

The Reserve Bank started consultation on the changes earlier this month. While industry representatives backed tightening LVRs, the public was more sceptical whether it was needed:

  • homeowners have experienced huge gains in equity, so aren't in immediate danger of owing more than their properties are worth
  • banks are already required to "hold a certain percentage of capital relative to their risk weighted assets", so should already be protected from "bad loans"
  • making it harder to borrow from banks will cut people who can't find alternative sources of credit out of the market
  • LVRs would do little to dampen house price growth (with which the Reserve Bank agreed)
  • the changes would "disproportionately impact first-home buyers" who typically have lower deposits, thanks to fast-rising prices.

On the latter point, the Reserve Bank said it was an "unavoidable consequence of addressing the financial stability risks we are currently seeing in the market".

"We note that under the new settings, banks will still be able to make up to 10 percent of new lending to owner-occupiers at high-LVRs, and the majority of this will be to first-home buyers," its summary of submissions siad. "In addition, the LVR exemption regime allows buyers who qualify for Kainga Ora First Home Loans, and those purchasing new build properties, to continue borrowing at higher LVRs."

The bank said its other option - keeping the amount of low-deposit borrowing at 20 percent, but raising the threshold of what counts as a low deposit to 25 percent - would have had a bigger impact on first-home buyers than its chosen course of action. 

In November, the Reserve Bank said it would start consultation on "the introduction of debt serviceability restrictions" - making it harder to borrow if you're already heavily leveraged. This is expected to have less of an impact on first-home buyers than those who already have mortgages. 

"[Debt-to-Income limits] reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default," the bank said in June. 

Despite the temporary pause the OCR is still widely expected to rise in the coming months, making borrowing and servicing a mortgage more expensive.