Monday, August 19, 2013

Reserve Bank cracks down on mortgage lending - TVNZ

Reserve Bank Governor Graeme Wheeler (Source: ONE News)

Reserve Bank Governor Graeme Wheeler - Source: ONE News

Banks will be subject to restrictions on high loan-to-value ratio (LVR) housing mortgage loans from October 1.

Reserve Bank Governor Graeme Wheeler has announced restrictions that mean most home buyers will have to front up with a 20% deposit.

Mr Wheeler said that banks will be required to restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows, measured as an average over a six-month transition period.

Allowing for exemptions that effectively means new home lending with deposits of less than a fifth of a property's value will amount to about 15% of new loans, half the volume of high LVR loans banks were making earlier this year.

The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy, Mr Wheeler said in a speech at Otago University. 

"Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. This is particularly the case in a market that is already widely considered to be over-valued," he said.

"The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy."

Some loans will not count towards the Reserve Banks measurement of banks' "speed limit" for lending.

These exemptions include Housing New Zealand's Welcome Home Loans, bridging loans, refinancing of existing loans and high-LVR loans to existing borrowers who are moving home but not increasing their loan amount.

Mr Wheeler has been balancing rising house prices in Auckland and Christchurch, the countrys two biggest cities, and the pressure they may put on broader inflation against increasing the appeal of an already strong kiwi dollar by hiking interest rates.

The introduction of the low-equity lending limits will give the central bank greater flexibility in considering the timing and magnitude of any future increases in the OCR which is sitting at a record-low 2.5%, he said.

'Banks will work hard to meet customer needs'

The New Zealand Bankers' Association says banks will continue to work hard to meet their customers' needs within the new restrictions.

But people should be aware they may be declined loans because of the new restrictions imposed by the Reserve Bank, New Zealand Bankers' Association chief executive Kirk Hope said.

"It's worth talking to your bank about your individual needs and circumstances," he said.

While the lending restrictions will adversely affect some businesses and householders seeking low deposit loans, the association's members are committed to meeting their obligations as registered banks and will comply with the new lending requirements, Mr Hope said.

Most small New Zealand businesses raise investment capital through equity in their homes, and LVR caps may limit their ability to invest in their businesses, he said.

The lending limits may also make it more difficult for first-home buyers and home-owners seeking a top-up loan for renovations.

Mr Hope said the real issue is a lack of housing supply in some parts of the country, not the availability of cheap credit.

While there are "positive moves" to deal with the supply issue, that will take some time to be resolved, he said.

Credit growth, currently at around 5%, is not driving this, he said.

Kiwibank puts first home buyers first

Kiwibank has responded to the new rules by promising to put first home buyers first in the lending queue.

Chief Executive Paul Brock said Kiwibank is still working through the implications of the new regulations and how they will affect the lending operation of the bank.

"When it comes to lending with deposits of less than 20 per cent, we will give priority to first home buyers over those who are buying investment properties," he said.

Mr Brock said Kiwibank has always been committed to getting people onto the property ladder.

"We strongly believe that the critical issue when assessing a loan application is the ability to service the debt rather than the amount of equity a person has in the loan," he said.

"Equity can be built over time and we do not want to push people out of purchasing a family home while they wait years and years to save a much bigger deposit.

"However to do this we will have to set priorities for our lending and first home buyers come first," Mr Brock said.

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