NZ central bank moves to further tighten lending standards

New Zealand’s central bank has moved to further restrict access to mortgages in a bid to dampen rising house prices which have climbed 30 percent in the past year. 

The Deputy Governor of the Reserve Bank of New Zealand Geoff Bascand said on Tuesday said the central bank will reduce the amount of low-deposit lending banks can provide from October 1.  

Further, the RBNZ could introduce debt-to-income limits and/or interest-rate floors later this year. 

Bascand said the central bank had already imposed tougher loan-to-value ratio restrictions but has not seen a sufficient reduction in risky lending.  

Therefore, the RBNZ proposes to restrict the amount of lending banks can do above an LVR of 80 percent to 10 percent of all new loans, down from 20 percent now.  

“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 DTIs. 

“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. 

DTIs will take longer 

The central bank will consult in October on implementing DTI restrictions and/or interest-rate floors. 

Introducing DTIs will take longer, Bascand added, whereas the banking industry has informed us that interest-rate floors could be implemented more quickly, 

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

Tuesday’s action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with New Zealand’s Minister of Finance. 

 “The updated MoU adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks,” Bascand stated.