Reserve Bank to ease loan-to-value restrictions for low deposit home loans

Banks will soon be able to lend more to homeowners with low deposits as the Reserve Bank (RBNZ) eases loan-to-value ratio (LVR) restrictions.

LVR restrictions place a cap on how much a bank can lend relative to a purchase point. The changes will allow more owner-occupiers to get a mortgage with a deposit of less than 20 percent.

In November 2021, the central bank tightened the settings so only 10 percent of a bank's lending can go to these borrowers with smaller deposits. But from June 1, the cap will be raised to 15 percent.

The LVR restrictions for investors would also be eased from a 5 percent limit for loans with LVR above 60 percent to a 5 percent limit for loans with LVR above 65 percent.

"In making this decision it is important to reiterate our assessment that the risks to financial stability posed by high-LVR lending have reduced to a level where we believe the current restrictions may be unnecessarily reducing efficiency," RBNZ Deputy Governor Christian Hawkesby said.

The previous LVR settings were put in place when risks were elevated, the RBNZ said.

"The restrictions built resilience in the financial system, which has been evident in the past year as house prices have fallen without widespread impacts to financial stability," the RBNZ said.

Average house prices peaked in the seven figures from October 2021 until June 2022, and have steadily been declining since.

A large driving force of the house price decline is high mortgage rates. The RBNZ has been hiking the official cash rate (OCR) to try to tackle high inflation, causing interest rates to soar.

Since the end of 2021, the RBNZ has raised rates by 525 basis points, with the last hike on Wednesday.

The LVR restrictions aim to reduce the impact and severity of housing market corrections by increasing the resilience of the banking system and households.

Feedback was sought from registered banks in late April on the implementation of the proposal.