Venkat Raman
Auckland, April 21, 2020
The Reserve Bank of New Zealand has written to commercial banks and lending institutions to consider moving away from the Loan-to-Value Ration (LVR) on mortgage loans to stimulate the market and help the economy to recover.
In his letter sent this morning, Deputy Governor and General Manager (Financial Stability) Geoff Bascand said RBNZ has proposed the move in response to the Covid-19 pandemic.
RBNZ has proposed that the banks consider the move; it is therefore a suggestion and not a directive at this stage.
“LVRs were introduced as a macro-prudential financial stability tool in October 2013 and have been adjusted over time. Adjusting the use and calibration of macro-prudential tools in response to economic conditions is how they are intended to be used,” he said.
The LVR provision allows the Reserve Bank to respond to cyclic pressures.
Mr Bascand said that the removal of LVR will help banks to keep lending to support customers, including with mortgage deferrals.
“As is normal for changes to macro-prudential measures, we are consulting on this proposal. In this case, consultation is open for seven days. Feedback will be collated from industry stakeholders over this period and a decision will be made promptly after that,” he said.
The change, if effected, will be made through a change in bank Conditions of Registration.
Monitoring lending activity
If the decision is made to remove the restrictions, the Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the Covid-19 pandemic becomes clearer.
Thereafter, RBNZ will review whether to reinstate LVR restrictions.
“This will provided banks and customers certainty that no further changes to LVR requirements will be made for at least one year,” Mr Bascand said.
About the LVR
Loan-to-Value Ratio (LVR) is a measure of how much a bank lends against a mortgaged property, compared to the value of that property.
There are currently two macro-prudential LVR restrictions (‘speed limits’) in place: (a) Banks are permitted to make no more than 20% of their residential mortgage lending to high-LVR (less than 20% deposit) borrowers who are owner occupiers (b) Banks are permitted to make no more than 5% of residential mortgage lending to high-LVR (less than 30% deposit) borrowers who are investors.
The calculation of new lending under the LVR policy would capture only the new amount of lending associated with any mortgage deferral, arising from the capitalisation of principal and/or interest during the deferral.
