NZ: Borrowers’ equity increases since LVRs introduced

Prospective borrowers taking out mortgages have become less vulnerable to the effects of a housing market bust, higher interest rates, and loss of income thanks to the introduction of Loan to Value Ratio (LVR) lending restrictions in New Zealand.

According to a study by the Reserve Bank, in 2013, the average new mortgage was for 67% of the property’s value, but by mid-2016, the average LVR declined to 55%. Over the same period, the amount of money given to borrowers where the amount borrowed was above 80% of the property’s value, declined from over 80% to 35%.

This, according to the Reserve Bank, suggests that “there has been a significant increase in the average equity buffers, driven by a widening gap between median mortgage debt and median house prices”. Prior to the introduction of LVRs, the Reserve Bank was concerned about the risks faced by banks if there was a sharp decline in house prices, a decline in household income, or an increase in interest rates.

Further, the Reserve Bank was concerned about the possibility that high LVRs could magnify the extent of a house price boom and bust, impacting the economy as a whole. However, since the introduction of LVRs and the resulting increased levels of equity, these risks should have been reduced.

Instead, if there is a decline of income or an increase in interest rates, households with lower LVRs are more likely to withstand the impacts associated with these changes and have higher flexibility to restructure or refinance their mortgages and maintain positive equity.

While the changes have helped reduce the impacts of a housing market bust, these changes have affected some borrowers who have taken out a home loan within the last 12 months.

According to RFi Group data, the proportion of recent home loan borrowers who have felt impacted by the LVR restrictions was at its highest in April 2017 compared to April 2018. This suggests that there may be at least 1 in 4 NZ home loan borrowers who did not meet the LVR lending restrictions.


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