Reserve Bank loosens mortgage limits to aid buyers
The Reserve Bank (RBNZ) will ease loan-to-value ratio (LVR) restrictions on mortgage lending from Dec. 1, giving banks more flexibility to lend to both first-home buyers and property investors.
Acting assistant governor for financial stability Angus McGregor (pictured left) said the decision followed a year-long review of macroprudential settings and the introduction of debt-to-income (DTI) restrictions in 2024.
“We concluded that the introduction of debt-to-income (DTI) restrictions last year means LVR settings can be less restrictive on average,” McGregor said in a media release. “This includes looser default settings that we expect will be in place most of the time, except for when risks are particularly elevated.”
RBNZ said the change reflects improving housing market conditions, with house prices now within its sustainable range and risky lending remaining low.
“Easier LVR settings will give banks more flexibility to lend, improving market efficiency and access to credit, particularly for first-home buyers,” McGregor said. “Now is an appropriate time to move to the new default settings.”
New lending limits for buyers and investors
From Dec. 1, the LVR caps will ease as follows:
- Owner-occupiers: The share of new lending with an LVR above 80% will rise to 25% (up from 20%).
- Investors: The share of new lending with an LVR above 70% will rise to 10% (up from 5%).
Existing exemptions will remain in place, including construction loans and Kāinga Ora First Home Loans. Currently, about 6% of owner-occupier lending and 27% of investor lending are exempt from LVR restrictions.
RBNZ will consult with banks on updating their Conditions of Registration over the next two weeks.
DTI restrictions to stay unchanged
While LVRs will be loosened, RBNZ confirmed that DTI restrictions will remain unchanged, continuing to act as a guardrail for risky lending during housing upswings.
“We have also reviewed our DTI restrictions and decided to keep settings unchanged,” McGregor said. “They remain calibrated to limit high-risk lending in housing upswings and periods of low interest rates, without the need for adjustment.”
Responsibility for reviewing both LVR and DTI policies will move to the new financial policy committee from next year, which will review settings at least annually and adjust them if housing risks rise.
Westpac: Modest easing, limited near-term impact
According to Westpac senior economist Darren Gibbs (pictured right), the changes represent a “modest easing” in macroprudential settings, reflecting the RBNZ’s confidence in its DTI framework.
“Following a review of the calibration of macroprudential settings, the RBNZ… announced that it will modestly ease the LVR restrictions applying to residential mortgage loans,” Gibbs said.
Westpac said the new thresholds will serve as the long-run neutral settings under the DTI regime, with tighter restrictions used only when financial stability risks are elevated.
“The easing in LVR restrictions should eventually help lift housing demand, particularly for first homeowners who tend to be most challenged in raising a 20% deposit,” Gibbs said.
However, the Westpac economist noted that LVRs have not been binding in recent quarters, suggesting little short-term impact on housing activity.
“In general, though, LVR restrictions have not been binding, hence we shouldn’t expect any significant near-term impact from the change,” Gibbs said. “However, as the housing cycle turns and values rise, these restrictions will become more binding. Hence the changes today will help the housing cycle run further than otherwise.”
Macroprudential settings evolve with new stability tools
RBNZ said it plans to review LVR and DTI settings annually, with assumptions reassessed every three to five years.
Looking ahead, the central bank’s preferred response to future downturns will be to reduce the counter-cyclical capital buffer, a new macroprudential tool being developed to maintain credit flow during economic slowdowns.
“DTI restrictions help to underpin borrower resilience by acting as a guardrail for risky lending,” McGregor said. “They can help contain the severity and consequences of housing market corrections.”
Overall, the move marks a measured recalibration of New Zealand’s lending rules – designed to support credit access while maintaining financial system stability as the housing market enters a more sustainable phase.
Read the Westpac insights on the RBNZ announcement here.
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