Mortgage lending rules will become more stringent after the government has given the Reserve Bank approval to tighten loan-to-value ratios and move to bring in debt-to-income ratios.

The central bank will reduce low deposit lending by banks to no more than 10% of their total lending from the current 20%. The measure will come into force on 1 October 2021.

The RBNZ has also received approval to introduce debt-to-income ratios or interest rate floors to ensure borrowers can afford to service their mortgages.

The rationale behind the shift is to give the Reserve Bank the flexibility to respond to emerging financial stability risks and deploy appropriate tools when required.

The design of the debt-to-income ratios is said to focus on minimising any negative impact on first home buyers. With many first home buyers having less than a 20% deposit, finance experts believe an adverse effect will be unavoidable. 

The government removed loan-to-value ratios in 2020 following the COVID-19 outbreak. But now, to try and cool the New Zealand property market, which has performed far better than expected, The Reserve Bank of New Zealand has once again implemented LVR restrictions.

The belief is that such restrictions will ensure the financial system is robust and borrowers can cope with any economic and financial pressures such as rising interest rates or a fall in house prices. If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage.

If the standard is that buyers must have over 20% deposit, the result will be fewer buyers in the market. With a decrease in demand, the hope is that there will be a corresponding decrease in house prices.

The RBNZ will start to consult on debt-to-income ratios and interest rate floors from 1 October 2021. The belief is that this process will take at least three months.