Reserve Bank leaves low deposit lending rules unchanged as mortgage rates climb

The Reserve Bank has decided to leave the rules on low deposit home lending exactly where they are, telling the country that the risks building in the housing market are, for now, contained.

The decision was announced on Friday 14 August and came out of the first annual review of macroprudential policy run by the bank’s new Financial Policy Committee, a group that met for the first time in February this year and now holds the power to switch lending restrictions on and off. Until this year those calls sat with the Governor and the Reserve Bank board. The committee is made up of the board chair, the Governor, three other board members and up to two external appointees.

Loan to value ratio restrictions, usually shortened to LVR, are not a ban on low deposit lending. They are a speed limit on how much of it a bank can write. Under the settings that have applied since 1 December last year, and which now stay put, banks can put up to 25 percent of their new owner occupier lending into loans where the borrower has less than a 20 percent deposit. For investors, up to 10 percent of new lending can go to borrowers with less than a 30 percent deposit.

“Housing risks are currently contained. Nationally, house prices have remained broadly flat in recent years, while mortgage lending growth has been modest and the share of higher-risk lending remains manageable,” Assistant Governor for financial stability Angus McGregor said in the Reserve Bank’s announcement, which was also carried on Scoop.

He said the committee looked at house price movements, the risk profile of recent mortgage lending, financial strain among existing borrowers and the resilience of the banking system before landing on no change. “We review settings annually to ensure they remain appropriate given housing market conditions and financial stability risks,” he said.

The numbers behind that judgement are not hard to find. Reserve Bank lending figures show new residential mortgage commitments of about $8.5 billion in June, spread across 22,368 loans, with an average size of $377,569. The share of that lending written above 80 percent of the property value held steady at 15 percent. The speed limit allows 25 percent. In other words, banks are nowhere near the ceiling the regulator has set for them, and have not been for some time. Loosening the rule further would not obviously get anybody into a house, because the rule is not what is stopping them.

First home buyers took 19 percent of new mortgage commitments in June and remain the main users of low deposit lending. Investor lending was 19.5 percent of new commitments, down from 21.8 percent a year earlier, according to figures reported by NZ Adviser.

The market those buyers are walking into is flat rather than falling. Real Estate Institute figures for July put the national median sale price at $760,000, down 0.7 percent on July last year, with sales volumes down 10 percent and the median time to sell out to 50 days, the fifth slowest July since records began in 1992. Only 726 properties, or 11.9 percent of all sales, went under the hammer. Auction rooms have stayed near their winter lows, with interest.co.nz reporting a sales rate of 38 percent at the latest round.

The other half of the Reserve Bank’s argument is that existing borrowers are coping. Credit bureau Centrix put residential mortgage arrears at 1.20 percent in June, the lowest since December 2022, with about 19,600 accounts past due and the most serious 90 day category down 15 percent on a year earlier. Newswire covered that fall in consumer arrears earlier this month. Households that came through the high rate years without falling over are, on the whole, still standing.

Debt to income limits also stay as they are. Those rules, switched on in July 2024, cap most new lending at six times gross income for owner occupiers and seven times for investors, with banks allowed to write 20 percent of new lending above the caps. “Debt-to-income (DTI) restrictions also remain in place. These complement LVR restrictions and are an important guardrail against the build-up of high-risk lending, particularly during periods of low interest rates and strong housing demand,” McGregor said.

That pairing is deliberate. When the Reserve Bank eased the deposit rules last October, it argued that having income limits in the toolkit meant the deposit limits could afford to be looser. The income cap catches the borrower who stretches too far, so the deposit cap does not have to do all the work. Friday’s decision keeps both halves of that arrangement in place for another year.

What the review does not address is the thing actually squeezing borrowers this winter, which is the price of money rather than the size of the deposit. Wholesale rates have moved sharply in the past two months, with the one year swap rate climbing from a little over 3 percent at the start of July to around 3.43 percent, and the two year rate from 3.36 percent to 3.7 percent. Banks fund fixed rate loans in that market, and they have passed the increase on. ANZ and BNZ both lifted fixed rates inside a fortnight, and Kiwibank and TSB followed them up, taking one two year standard rate to 6.29 percent. Banks have pointed to the conflict in the Middle East and the cost of offshore funding as the driver.

For a first home buyer, that combination is awkward. The deposit rule has plenty of room left in it, so a bank that wants to lend at 90 percent of the value of a house can. Whether it will still depends on the serviceability test, and that test is run at rates well above the advertised ones, which have just gone up. The binding constraint is the monthly payment, not the regulator.

The Reserve Bank intends to look at the settings again in around twelve months, though it says the review can be brought forward if conditions warrant. On its own reading, the housing market is not the thing keeping the financial stability team awake at the moment.

Are the deposit rules or the interest rate the real barrier for you right now? Tell us in the comments below.

This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂