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The Reserve Bank has today decided to remove mortgage loan-to-value ratio (LVR) restrictions for 12 months. The decision was made to ensure LVR restrictions didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the COVID-19 pandemic.
The Reserve Bank’s decision was made in line with its financial stability mandate. The Bank reached its conclusion after reviewing a Regulatory Impact Assessment and robust feedback received from submitters over the consultation period, Deputy Governor and General Manager of Financial Stability Geoff Bascand says.
“The Reserve Bank received more than 70 submissions from members of the public and industry, expressing a wide range of views. The Reserve Bank also directly approached a number of NGOs - including Māori and Pasifika groups to make them aware of the proposed changes, and to provide them a chance to provide feedback on the proposals.
“Although the consultation period was short by the Reserve Bank’s typical standards, this was necessary to respond swiftly to an unprecedented set of economic events. The feedback raised a number of valid points and concerns which were all carefully considered.”
Views on the proposals were mixed, reflecting both the costs and benefits of borrowing restrictions.
Some submitters recognised that removing the restrictions might allow more first home buyers to purchase a home.
All locally incorporated banks who responded were in favour of removing LVR restrictions, noting this will allow them to support customers through the impact of COVID-19.
Of those submitters that were against the removal of the LVR policy, many were concerned about potential adverse impacts on financial stability, such as the risk of bank failure. They also noted that the economy has weakened and job security has reduced, and the ability of people to service a mortgage will 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,” Mr Bascand says.
The Regulatory Impact Assessment concludes that removing LVRs now does not weaken the resilience of the system. 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.
Mr Bascand says the action will also avoid any uncertainty around the implications of LVR limits from the mortgage deferral scheme. “It is important banks continue to provide support to credit-worthy borrowers during these extraordinary times.”
The decision is effective as of 1 May. The change will be made via a change in bank Conditions of Registration.
“The Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the COVID-19 pandemic becomes clearer. While we’ve eased the restrictions completely for the next twelve months, we will review the most appropriate setting for LVRs in a year’s time,” Mr Bascand says.
LVR restrictions were imposed as a counter-cyclical macro-prudential financial stability tool in October 2013. LVR restrictions have been effective in supporting financial system stability during the upswing in the credit and housing cycles since the introduction of the restrictions in 2013. By significantly improving the equity positions of mortgage borrowers, it is likely that a significantly smaller number of borrowers will have to sell their house or default on their mortgage as a result of the current economic shock. The current economic conditions resulting from the COVID-19 crisis have led to the Reserve Bank removing LVR restrictions, given the counter-cyclical nature of the LVR policy.