Loan-to-value restrictions explained
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. LVR restrictions are one of our main macroprudential tools we can use to help reduce risks to the financial system during boom-bust financial cycles.
Why we impose LVR restrictions
LVR restrictions support the stability of the housing market and help reduce the risk of a sharp correction in house prices. They also provide an extra buffer if a housing downturn occurred, which would particularly affect highly-indebted home owners and investors.
Housing lending makes up about half of bank lending in New Zealand, and a home is usually the single largest asset a family owns. Property is also a major part of many New Zealanders' investment portfolios.
A sharp correction in house prices is therefore a significant risk to the financial system. It could have a negative impact on how the banking system works and cause lasting damage to households and the wider economy.
Like other asset markets, housing can be subject to ‘fire sale’ effects in an economic downturn. This is when indebted borrowers sell property to pay down debt, which in turn depresses prices and creates further incentives to sell and/or reduce spending and borrowing.
Limits only apply to new loans
LVR restrictions only apply to new loans. They do not apply retrospectively to existing loans.
The restrictions only affect existing borrowers if they want to take out a ‘top-up’ loan that takes their total LVR above the required threshold.
Banks will still apply their own lending criteria to individual borrowers and may choose to not provide finance in certain circumstances or to provide it only at lower LVRs.
Why we first introduced LVRs
We first introduced LVRs in October 2013 in response to rapid growth in house prices, especially in Auckland, which was accompanied by a sharp increase in the use of low-deposit loans. The LVR policy helped to strengthen bank balance sheets and had an immediate dampening effect on housing market activity and house price inflation.
How LVR restrictions are imposed
Restrictions on high-LVR residential mortgage lending set a ‘speed limit’ on how much low-deposit lending banks can do. The speed limits operate by setting a cap on the share of high-LVR lending that can be provided by each bank over a given time period (a 3-month or 6-month lending period, depending on a bank's size).
If a bank’s high-LVR residential mortgage lending exceeds the speed limit it will be in breach of its conditions of registration. We would need to consider the reasons for the breach and we might impose a range of sanctions.