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New Zealand’s central bank cracks down on risky mortgages

By Debabrata Das

00:58, 3 August 2021

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The Reserve Bank of New Zealand (RBNZ) will tighten restrictions on mortgages with high loan-to-value ratios (LVR) from 1 October as the central bank wants to protect borrowers from “future economic and financial conditions”.

Specifically, the RBNZ will reduce the amount of lending banks can do above an LVR of 80%, to 10% from 1 October, as compared to 20% currently.

The LVR is calculated by dividing the loan amount by the property values. The 80% figure is critical as an LVR above this is considered risky by lenders. 

“Concerned” at high LVRs

“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 debt-to-income ratios,” Geoff Bascand, deputy governor and general manager for financial stability at the RBNZ, said in a statement.

With the RBNZ set to raise interest rates from August, the focus has now shifted to individual borrowers and whether they can withstand higher costs stemming from a higher official cash rate.

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Housing prices have been a key reason for the rising levels of household debt in New Zealand. Median prices for residential property across New Zealand rose 28.7% year-on-year to NZ$820,000 in June 2021. Housing equity, or the difference between the market value of a property and the amount still owed on that home loan, has risen to an equivalent of 100% of New Zealand’s gross domestic product in the last two years, according to industry experts.

Negative equity

“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,” Bascand said.

He added that the LVR restrictions put in place by the central bank earlier this year has not resulted in a “sufficient reduction in risky lending”.

Apart from tightening LVR restrictions, the central bank will start consultations on implementing debt-to-income restrictions as well as interest rate floors to ensure sustainable borrowing.

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Read more: Consumer debt levels drag on RBNZ interest rate strategy

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