The Reserve Bank lifts LVR restrictions, seeing the risk that banks are reluctant to lend

The restrictions on mortgage loans will be lifted for at least 12 months, and the Reserve Bank said concerns about risky loans were outweighed by concerns that banks are too reluctant to lend.

On Thursday night, the Reserve Bank announced that it had concluded consultations on whether to ease the loan / value ratio (LVR) restrictions in response to the Covid-19 pandemic.

The central bank also allowed banks to allow clients to defer mortgage payments for up to six months without having to classify loans as delinquent.

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Introduced to protect the stability of the financial system as home prices increased, LVR rules imposed restrictions on the amount of loans from a bank that could go to borrowers with a deposit of less than 20 percent of the value of the property.

The Reserve Bank said its mortgage deferral scheme could have implications for LVRs, and that interest on the loans would continue to accrue.

In a statement, the Reserve Bank warned that the greatest stability risk today was a lack of loans.

“Given the current uncertainty surrounding the economic outlook, the Reserve Bank believes that banks are unlikely to weaken lending standards to high-risk borrowers,” said Geoff Bascand, head of financial stability at the Bank of the Book in a statement.

“The most likely risk is that banks will be too cautious about lending to creditworthy borrowers.”

The decision comes after a short consultation period. Bascand announced that the bank was proposing to lift the restrictions on April 20. The rule changes will take effect on Friday.

“Although the consultation period was short by typical Reserve Bank standards, this was necessary to respond quickly to an unprecedented set of economic events,” Bascand said in a statement.

The bank received “more than 70” submissions from the public and industry, as well as reached out to non-governmental groups for comment.

All of the New Zealand incorporated banks that responded to the inquiry were in favor of removing the restrictions.

A number of presenters were against flexibilization. “Many were concerned about possible adverse effects on financial stability, such as the risk of bank failure,” the Reserve Bank statement said.

“They also noted that the economy has weakened and job security has declined, and people’s ability to pay a mortgage is likely to decline in the coming months.”

A regulatory impact statement concluded that the removal of the LVR did not weaken the resistance of the system.

“Removing the LVR constraints now supports financial stability by removing a potential obstacle to the flow of credit in the economy, helping to smooth the recession.”

Bascand said the banks will monitor the loans for the next 12 months as the economic impact of Covid-19 clears up. “We will review the most suitable configuration for LVRs in one year.”