The Reserve Bank has put speculation to rest by imposing a limit on higher loan-to-value ratio mortgage lending (ie low equity mortgages). Effective from 1 October 2013, banks are limited in the amount they can lend to new borrowers who wish to purchase residential property with a deposit of less than 20%, or existing borrowers, who wish to increase their loan above an 80% loan to value ratio. Lending to such individuals is now only able to comprise 10% of the dollar value of a bank's new residential mortgage lending. Banks will, however, have a six month window in which to comply, in order to allow low equity loans already approved to be honoured. The Reserve Bank has also warned banks that it expects them to comply with the spirit and intent of the restrictions and that any attempts to develop innovative products that circumvent the LVR restrictions will not be viewed favourably.
The Reserve Bank says that the limit is a temporary measure which is aimed at settling New Zealand's booming housing market. The housing market comprises around 50% of bank lending in New Zealand so any instability in the housing market (such as rapidly increasing house prices or a collapse in house prices) has the ability to affect the financial stability of the New Zealand economy. The extent to which the limit will settle the housing market in cities where housing is in demand (such as Christchurch and Auckland) is questionable. It may be that many low equity borrowers, such as first-time buyers, turn to family members or second tier lenders (who fall outside the RBNZ regulatory net) to obtain the funds needed to purchase property.
