The Reserve Bank of New Zealand is to begin consultation on new proposals to tighten mortgage lending standards, including:
- Reducing the amount of lending banks can provide to owner-occupiers at a Loan to Value Ratio (LVR) above 80 percent – reducing the share from 20 percent of all new lending down to 10 percent. This tightens the current restriction, which will make it harder for borrowers to secure a loan with less than 20% deposit.
- Introducing debt to income ratios (DTI), which would put a ceiling on the total debt a borrower could apply for relative to their gross income. For example, in their May 2020 Financial Stability Report, the Reserve Bank chart high debt-to-income using a DTI above 5. For a borrower with a gross income of $100,000 a debt-to-income ratio of 5 would equate to total debt of $500,000. This is a blunt tool, as the ability to service a loan is dependent on a range of factors, for example the number of dependents you have. These other factors, such as your dependents, fixed commitments and living costs are already considered when banks test your ability to service a loan.
- Introducing an interest rate floor, which would set a floor on the test interest rates that banks use in their serviceability assessment. Lenders already use a test interest rate when looking at an applicant’s ability to service a loan, which is above current prevailing rates, in recognition that a loan is a long-term commitment and rates will vary over the period of the loan. This proposal would see the Reserve Bank set a floor to the test interest rate used, which would be applied evenly across all borrower types.
The Bank will begin consulting on changes to the amount of lending that banks can do at a LVR above 80% later this month, with a view to introducing it from 1 October 2021.
The bank noted that it intends to consult in October on implementing Debt-to-Income restrictions and/or interest rate floors. Introducing DTIs will take longer, whereas interest rate floors could be implemented more quickly.