About the bulletin
Loan-to-value ratio (LVR) restrictions have been in place since 2013. To complement them, we introduced debt-to-income (DTI) restrictions in July last year. We have since reviewed our approach to how we set these macroprudential policies through the cycle. This bulletin explains the findings from this review.
Key findings
LVR and DTI restrictions work together to strengthen the resilience of borrowers and the financial system. DTI restrictions enhance resilience by linking debt levels more closely to income. LVR restrictions enhance resilience by requiring borrowers to have more equity.
LVR settings can be less restrictive on average given the introduction of DTI restrictions. We could do this by:
- having looser long-run settings; and/or
- by tightening from this level less often.
Long-run LVR settings are default settings we expect will be in place most of the time. We will typically move LVR settings towards this level when risks are not particularly elevated.
Slightly easier long-run LVR settings may be appropriate now that DTI restrictions are established. We intend to use the following LVR settings as our long-run assumption going forward:
- For owner occupiers, limit the share of new lending allowed with an LVR above 80% to a maximum of 25% (up from 20%).
- For investors, limit the share of new lending allowed with an LVR above 70% to a maximum of 10% (up from 5%).
We also expect to tighten LVR settings from their long-run level less often than we have in the past.
We plan to review DTI and LVR settings annually. We will assess whether risks motivate tighter LVR settings. In general, we expect to keep DTI settings stable over the cycle. For both policies, we intend to review the assumption for long-run settings every 3 to 5 years.
Our preferred response to severe economic downturns is to reduce the counter-cyclical capital buffer – instead of easing LVR or DTI restrictions. This is a new tool for us. We are currently revisiting its settings and implementation date as part of our review of capital settings.