Reserve Bank to tighten mortgage lending rules

It seeks industry feedback

Reserve Bank to tighten mortgage lending rules

The Reserve Bank of New Zealand (RBNZ) and the New Zealand government have agreed to tighten mortgage lending standards following the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance.

RBNZ Deputy Governor and General Manager for Financial Stability Geoff Bascand said the updated MoU added debt serviceability restrictions to the central bank’s policy toolkit, improving its approach to addressing financial stability risks.

“We are focused 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 said.

Bascand added that some buyers could face negative equity if house prices dropped, which means the value of their property would be below the outstanding balance on their mortgage. As a result, the RBNZ adjusted loan-to-value ratio (LVR) restrictions. However, the central bank has not yet seen a sufficient reduction in risky lending.

Read more: RBNZ releases latest data on borrowing activity

The RBNZ now seeks industry feedback on a proposal to further reduce the amount of high LVR lending to owner-occupiers, particularly restricting the amount of lending banks can do above an LVR of 80%, to 10% of all new loans - down from 20% presently.

“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,” Bascand said.

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

The RBNZ will begin consulting on the proposal later this month, with the aim to introduce it from October 01, 2021.