A loan-to-value ratio (LVR) is a measure of how much a bank lends against residential property, compared to the value of that property. Borrowers with LVRs of more than 80 percent (less than 20 percent deposit) are often stretching their financial resources. They are more vulnerable to an economic or financial shock, such as a recession or an increase in interest rates.
LVR restrictions or ‘LVR speed limits’ restrict the amount of high-LVR lending a bank can do. These restrictions reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly-indebted home owners.
LVR restrictions are one of four macro-prudential tools the Reserve Bank can use to help reduce the system-wide risks that can develop during boom-bust financial cycles. These risks can be driven by rapid credit growth, rising household debt, or excessive liquidity.
This short video – Booms, busts and the way between – explains macro-prudential policy and the tools the Reserve Bank has to smooth out boom-bust cycles.
The Reserve Bank believes that the housing market is posing a growing risk to financial stability in New Zealand. Housing lending makes up about half of bank lending in New Zealand, and a home is usually the single largest asset that a family owns. Because of this, any instability in the housing market has the potential to undermine the stability of the wider banking system and economy.
In October 2013, Reserve Bank Governor Graeme Wheeler published an opinion article: Why Loan-to-Value Ratios were introduced.
The Reserve Bank actively monitors developments in the housing market and is committed to taking action when necessary.
Restrictions on high-LVR residential mortgage lending will take the form of a ‘speed limit’ that constrains how much high-LVR lending banks can do. This will allow banks to continue some high-LVR lending to some borrowers.
Banks will be required to restrict new residential mortgage lending at LVRs of over 80 percent (deposit of less than 20 percent) to no more than 10 percent of the dollar value of their new residential mortgage lending.
LVR restrictions will apply to new high LVR loans, and not retrospectively to existing loans.
Existing borrowers will only be affected if they want to take out a ‘top up’ loan which would take the total loan to value ratio above 80 percent.
The new restrictions will take effect on 1 October 2013.
No. Banks will still be able to do some lending to borrowers with low deposits. However, they must operate within the 10 percent speed limit on high LVR-lending.
Yes. This exemption means that low deposit lending will fall outside the 10 percent speed limit if it is financing the construction of a new house or apartment. For more information read the questions and answers about the exemption.
The tightening of rules around high-LVR lending will support the stability of the housing market and help reduce the risk of a disorderly correction in house prices. While the availability of high-LVR loans will be reduced, many borrowers are not reliant on high-LVR lending and others may be able to obtain high-LVR loans under the speed limit approach.
The Reserve Bank actively monitors developments in the housing market, financial system and the economy, and is committed to taking action when necessary to support the long-term stability of the financial system. LVR restrictions are temporary measures, and will be lifted once housing market risks to financial stability lessen.
The new restrictions took effect on 1 October 2013. Initially, banks need to comply with the speed limit over a six month window. The window starts on the day LVR restrictions take effect.
This approach means that banks can run over the 10 percent speed limit in some individual months, if they have some loan pre-approvals they need to continue to honour. If so, they will need to run below the speed limit in other months within the six month window to ensure that they meet the 10 percent speed limit for the six month period as a whole.
After the first six month window has elapsed, the Reserve Bank will begin assessing the larger banks (those with housing lending of more than $100 million) using three-month rolling windows.
If a bank breaches the speed limit it will be in breach of its conditions of registration. The Reserve Bank would need to consider the reasons for the breach and may impose a range of sanctions. For more information about breaches, refer to the Statement of Supervisory Approach and the Statement of Enforcement Approach.
The following is the Reserve Bank’s schedule for the release of the Financial Stability Report.