Reserve Bank to tighten loan-to-value restrictions, admits more difficult for first-time homebuyers to climb ladder
Some experts said the Reserve Bank itself was to blame for the surge in house prices, after cutting the official exchange rate (OCR) in March 2020 to boost the economy as COVID-19 spread. in the world. They were due to increase in August before the last lockdown was ordered.
The Reserve Bank began consulting on the changes earlier this month. While industry representatives supported tightening LVRs, the public was more skeptical of its necessity:
- owners have seen huge equity gains, so they don’t run the immediate risk of owing more than the value of their properties
- banks are already required to “hold a certain percentage of capital relative to their risk-weighted assets”, and should therefore already be protected from “bad debts”
- by making it more difficult to borrow from banks, people who cannot find other sources of credit will be excluded from the market
- LVRs would do little to curb house price growth (which the Reserve Bank agreed with)
- the changes would “disproportionately impact first-time home buyers” who typically have lower deposits, thanks to rapidly rising prices.
On the latter point, the Reserve Bank said it was an “inevitable consequence of managing the financial stability risks that we are currently seeing in the market”.
“We note that under the new parameters, banks will still be able to give up to 10% of new homeowner loans at high LVRs, and the majority of that will be to first-time homebuyers,” his siad summary of submissions. . “In addition, the LVR exemption scheme allows buyers eligible for Kainga Ora first-time home loans, and those purchasing new construction properties, to continue to borrow at higher LVRs.”
The bank said its other option – keeping the amount of low deposit loans at 20%, but raising the threshold for what counts as a low deposit to 25% – would have had a greater impact on first-time buyers. house as the chosen course of action.
In November, the Reserve Bank announced that it would begin consultations on “introducing debt service restrictions”, which would make borrowing more difficult if you are already heavily in debt. This should have less of an impact on first-time homebuyers than on those who already have a mortgage.
“[Debt-to-Income limits] reduce the likelihood of mortgage defaults while LVRs greatly reduce losses for banks in the event of borrower defaults, ”the bank said in June.
Despite the temporary hiatus, OCR is expected to increase further in the coming months, making borrowing and servicing a mortgage more expensive.