The Reserve Bank has today announced a ‘modest’ easing of Loan to Value Ratio (LVR) restrictions from early 2018.
From 1 January, banks will be able to loan up to 15 per cent of their mortgage lending to owner occupiers with a deposit of less than 20 per cent of the value of the property. Currently a bank can only lend 10 per cent of its mortgage portfolio to customers with less than 20 per cent deposit.
Also, banks will be able to loan up to 5 per cent of their mortgage lending to residential property investors with an LVR of more than 65 per cent (currently 60 per cent).
Reserve Bank Governor Grant Spencer said this morning, “Domestically, LVR policies have been in place since 2013 to address financial stability risks arising from rapid house price inflation and increasing household debt. These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans. Over the past six months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016, a more general firming of bank lending standards and an increase in mortgage interest rates in early 2017.
“Housing market policies announced by the Government are also expected to have a dampening effect on the housing market.”
“In light of these developments, the Reserve Bank is undertaking a modest easing of the LVR restrictions.”
“The Bank will monitor the impact of these changes and will only make further LVR adjustments if financial stability risks remain contained. A cautious approach will reduce the risk of resurgence in the housing market or deterioration in lending standards.”
The announcement is considered a bold move by observers of the bank, who generally expected that a review of the rules would be announced rather than such a swift change.
While the moves were modest, ASB chief economist Nick Tuffley said the changes had come “a little sooner” than expected.
“Given a degree of uncertainty around how temporary the election has impacted market activity and uncertainty over when government tax/housing policies will take effect, we had expected the Reserve Bank would wait a little longer,” Tuffley said.