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Reserve Bank gets serious about 'risky lending'

The Reserve Bank of New Zealand is looking at ways to tighten up mortgage lending standards in another effort to slow down a rampant housing market.

Tuesday, August 3rd 2021, 11:11AM 1 Comment

by Matthew Martin

The Reserve Bank's deputy governor and general manager for financial stability Geoff Bascand says consultation on its proposal to restrict the amount of lending banks can do above an LVR of 80% to 10% of all new loans will begin later this month with a view to introducing it from October 1.

The action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance.

“The updated MoU adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks,” Bascand says.

“We are focussed on ensuring borrowers are resilient to a range of future economic and financial conditions. We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs."

Bascand says if house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage.

“We’ve already made adjustments to Loan-to-Value Ratio restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”

He says to prevent the problem from getting worse, the RBNZ will be consulting on a proposal to further reduce the amount of high LVR lending to owner-occupiers.

“We also intend to consult in October on implementing Debt-to-Income (DTI) restrictions and/or interest rate floors in an effort to provide further comfort that borrowing is sustainable.

"Introducing DTIs will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly.

“Consultation will be focused on operational feasibility and possible calibration of these tools, including their impacts on investors and first home buyers,” Bascand says.

RBNZ governor Adrian Orr says house prices are above a sustainable level and the bank, in its role as guardian of the financial system, is trying to limit these risks for the long-term wellbeing of everyone - borrowers, lenders, and the general economy.

"We have spoken and written a lot about the many drivers of the current high house prices in New Zealand. We acknowledge that one of these reasons is the low interest rates due to our response to the Covid-19 economic shock.

"We had to significantly lower the Official Cash Rate to best meet our monetary policy mandate of maintaining low and stable inflation, and contributing to maximum sustainable employment."

Orr says the pandemic-induced global economic shock created risks of falling prices (deflation), rising unemployment, and unprecedented global financial stress.

"The worst of these outcomes has been headed off by successful health management, government-led wage and business funding support, and lower interest rates aimed to boost cash-flows and keep business afloat."

Orr says he expects banks operating in New Zealand to take heed of the RBNZ's signal to consult on the tightening of lending standards – both LVRs and debt servicing criteria.

"They must make their lending decisions with the best long-term interests of the borrower in mind."

For details about the proposal and consultation, click here

Tags: Adrian Orr DTIs Geoff Bascand LVR Mortgage Rates mortgages RBNZ Sustainability

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Comments from our readers

On 3 August 2021 at 4:27 pm Laurie said:
So much doom and gloom and negativity at the moment. FMA, FSCL, FAANZ, NSFSG, KANS, Strategi, RBNZ and so on.... and on. Comply or suffer, etc. Why does Tarawera Publishing appear to delight in highlighting the negative? How about a little more positivity thanks?

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Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA 4.55 ▲2.85 ▲3.25 3.55
ANZ 4.44 ▲3.20 ▲3.59 ▲4.00
ANZ Blueprint to Build 1.68 - - -
ANZ Special - ▲2.60 ▲2.99 ▲3.40
ASB Back My Build 1.79 - - -
ASB Bank 4.45 ▲2.85 ▲3.25 3.55
Basecorp Finance 5.49 - - -
Bluestone 3.49 3.34 2.99 3.34
BNZ - Classic - 2.55 2.95 3.25
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 4.55 3.15 3.22 3.85
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.95 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland Bank - Online 2.25 1.85 2.35 2.65
Heretaunga Building Society 4.99 3.80 3.90 -
Lender Flt 1yr 2yr 3yr
HSBC Premier 4.49 2.19 2.45 2.69
HSBC Premier LVR > 80% - - - -
HSBC Special - 2.25 - -
ICBC 3.69 2.35 2.75 3.05
Kainga Ora 4.43 2.88 3.28 3.59
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.75 ▲3.50 ▲3.74 ▲4.34
Kiwibank - Offset 3.75 - - -
Kiwibank Special 3.75 ▲2.65 ▲2.89 ▲3.49
Liberty 5.69 - - -
Nelson Building Society 4.95 2.99 3.24 -
Lender Flt 1yr 2yr 3yr
Pepper Essential 4.79 - - -
Resimac 3.39 2.98 2.79 3.29
SBS Bank 4.54 ▲2.99 ▲3.39 ▲3.59
SBS Bank Special - ▲2.49 ▲2.89 ▲3.09
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - 2.35 - -
The Co-operative Bank - Owner Occ 4.40 2.55 2.95 3.39
The Co-operative Bank - Standard 4.40 3.05 3.45 3.89
TSB Bank 5.34 3.35 ▲3.75 ▲4.05
TSB Special 4.54 2.55 ▲2.95 ▲3.25
Wairarapa Building Society 4.99 3.55 3.49 -
Lender Flt 1yr 2yr 3yr
Westpac 4.59 3.15 3.55 4.09
Westpac - Offset 4.59 - - -
Westpac Special - 2.55 2.95 3.49
Median 4.54 2.92 3.24 3.49

Last updated: 16 September 2021 9:00am

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