Government and Reserve Bank agree on new steps to tighten mortgage lending

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Mortgage rules should be tightened after the government gives the Reserve Bank permission to tighten credit-to-value ratios and move on to introduce debt-to-income ratios.

Reserve Bank of New Zealand

Reserve Bank of New Zealand
Photo: RNZ / Alexander Robertson

Treasury Secretary Grant Robertson said in a statement that the central bank will begin consultations to cut lending by low-deposit banks to no more than 10 percent of their total from the current 20 percent. The measure will come into force on October 1.

The government also approved the RBNZ for debt-to-income ratios or minimum interest rates so that borrowers can afford to service mortgages.

“This change ensures that the Reserve Bank can respond flexibly to emerging risks to financial stability and use the appropriate instruments as needed,” Robertson said.

He said the debt-to-income ratio will be designed to minimize any negative impact on early home buyers, with consultations starting in October.

Next steps changes made at the beginning of the year to cool the housing market, which have proven largely ineffective in slowing the 20 percent annual rise in house prices.

RBNZ Deputy Governor Jeff Baskand said additional constraints are needed to ensure the resilience of the financial system and the ability of borrowers to cope with any economic and financial challenges, such as higher interest rates.

“We have already adjusted the Loan-to-Value Ratio (LVR) limits to partially manage this risk, but we have not seen enough reduction in risky lending.”

“If home prices fall, some buyers may face the possibility of negative equity – which means that the value of their property is below the outstanding balance on their mortgage,” Baskand said.

The RBNZ will hold consultations on DTI and minimum interest rates from October, and it will take at least three months, he said.

Robertson said that the purpose of the previous and new steps was to increase accessibility for first home buyers… Previously, the measures were aimed at real estate investors.

Robertson said they also clarified in the memo that the bank will need to avoid negatively impacting first home buyers where possible.

“I believe that this agreed language will set clear public expectations while maintaining the operational independence of the Reserve Bank. It is still up to the Reserve Bank how it decides to impose any restrictions given this condition, ”Robertson said.

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