Feedback wanted on low-equity loan restrictions

The Reserve Bank prepares its new macro-prudential tool to restrict lenders' ability to write low-equity loans.

The Reserve Bank is seeking feedback on its new macro-prudential tool to restrict lenders' ability to write low-equity loans.

The central bank has released a consultation paper on the "Framework for restrictions on high-LVR (loan to value ratio) residential mortgage lending" and wants views on its application.

Work has started on the high-LVR restrictions as it will mean a number of changes to the existing prudential framework, the bank says. No final decision has been made about imposing the restrictions.

"The Reserve Bank's intention in undertaking this consultation is to ensure that the banking system is sufficiently well positioned so that LVR restrictions could be applied in the relatively near future should this be considered necessary," the document says.

The main change the bank expects would set out the threshold at which the restriction would apply, and would not necessarily be a blanket ban.

"The RBNZ would primarily target mortgage loans with LVRs of 80 percent and above, and focus on a 'speed limit' approach (whereby it would restrict the share of new lending that banks can extend to borrowers with low deposits), rather than banning such loans altogether," Westpac Banking Corp senior economist Felix Delbruck says in a note.

"The RBNZ is keen to give macro-prudential tools a fair crack - possibly before moving the OCR. As such the implication could be a later start to rate hikes as the RBNZ watches for any impact on lending and the housing market (which at this stage is very uncertain)," he says.

The document comes after global rating agency Standard & Poor's published a report saying the most effective tool in the macro-prudential policy would be the introduction of counter-cyclical capital buffers, where banks hold more capital when the credit cycle has peaked, or adjusting sectoral capital requirements, where banks hold extra capital against sector specific lending.

S&P said imposing restrictions on the level of low-equity mortgages is likely to happen in the short-term and could be "considered a quick win and an appropriate measure". Still, the rating agency expects its effectiveness would be limited relative to imposing capital controls on the housing sector if done in isolation.

The Reserve Bank signed a memorandum of understanding with Finance Minister Bill English last month on how it will use the tools.

The regulator is looking at ways to cool the country's heating property market without hiking interest rates, which could stoke demand for an already over-valued currency.

Governor Graeme Wheeler has signalled his discomfort with the rapid increase in the level of high loan-to-value ratio lending, and the bank has already tweaked its requirements for how lenders calculate their risk-weightings on high LVR loans, meaning they will need to hold more capital.


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