New Loan Restrictions Set to Curb Escalating House Prices

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This coming Tuesday the 1st of October the new Reserve Bank restrictions kick in, reports Tony Groenewald from AA Mortgages. And there's already a lot of speculation about what this will do to the Auckland property and loan market.

It’s only days away until the 1st of October deadline when the NZ Reserve Bank will impose new limits on the loan value ratio of mortgages for banks across the country.

Lenders will be required to restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the value of their new housing.

Since Wednesday, the 28th of August, ANZ was limited to 85%, and since Thursday, 29th of August, ASB’s LVR has been limited to 80%.

Westpac’s loan value ratio has experienced no change as of yet, and RESIMAC, the Australian second tier lender, is still offering a 90% LVR on mortgages.

This is set to change, however, when the new LVR limit is set in place very soon in October, and all banks will be forced to an LVR of 80%. In simple terms, this means that mortgages will only pay for 80% of a home’s value, so a 20% deposit will be needed from the homebuyer to finance home purchases.

The Reserve Bank has opted to put this LVR limit in place due to the rapidly increasing house prices, which have become cause for concern over the past few months. Such prices, according to the Reserve Bank, pose a risk “to the financial system and the broader economy”. House prices in Auckland have increased to a record high of over $780,000 recently.

“In the current situation where escalating house prices are presenting a threat to financial stability but not yet to general inflation, macro prudential policy offers the most appropriate response,” said Reserve Bank governor Graeme Wheeler.

“The Reserve Bank considers that LVR speed limits will be more effective than other macro prudential tools in constraining private sector credit growth in the housing sector and dampening housing demand. Other macro prudential instruments, such as counter-cyclical capital buffers and capital overlays on sectoral capital requirements, are likely to have less effect on the demand for housing-related credit and on house price growth.”

LVR restrictions are designed to slow the growth of house-related credit debt and hopefully should aid in curbing the alarming house price inflation throughout Auckland, according to mortgage broker Tony Groenewald.

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