RBNZ plans to change home loan rules

The Reserve Bank of New Zealand (RBNZ) plans to reduce financial stability risks by introducing debt-to-income (DTI) restrictions for home loans.

Under proposals suggested by the RBNZ, banks would have to ensure that:

• No more than 20% of new home loans to owner-occupiers had a DTI greater than 6.
• No more than 20% of new home loans to investors had a DTI greater than 7.

However, these proposals have not been finalised: the RBNZ is conducting a consultation process, which will end on March 12. The RBNZ will then consider the feedback and announce its decision, around the middle of the year.

LVR restrictions to be eased

At the same time, the RBNZ has proposed easing the current loan-to-value ratio (LVR) restrictions:

• Currently, 15% of the owner-occupier home loans that banks issue can have LVRs above 80%; that share would rise to 20%.
• Currently, 5% of the investor loans that banks issue can have LVRs above 65%; that LVR threshold would rise to 70%.

Again, the LVR changes are the subject of consultation.

Changes designed to promote financial stability

RBNZ Deputy Governor Christian Hawkesby said it was important to have appropriate policies in place to reduce the financial stability risks associated with boom and bust credit cycles.

“DTI restrictions, which set limits on the amount of debt borrowers can take on relative to their income, will complement other tools we use to support financial stability, including LVR restrictions on residential mortgage lending,” she said.

“While the LVR tool is aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage, the DTI tool is aimed at reducing the probability of a systemic wave of households defaulting. 

“We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies. Introducing DTI restrictions will also allow us to loosen LVR settings without increasing risks to financial stability. Working together, these tools enable us to more efficiently target financial stability risks.”