LVR restrictions

Stuff reports:

The Reserve Bank is expected to forge ahead with controversial restrictions on home loans within the week – and there will be no exceptions for first home-buyers.

A banking source said banks were told on Friday to prepare for restrictions which will impose a 12 per cent ”speed limit” on their total new lending going on low equity mortgages.

That will effectively halve the amount of high loan-to-value (LVR) lending that the banks are currently doing, making it much harder to get a mortgage with a deposit of less than 20 per cent.

The source said the Reserve Bank’s restrictions were much more extreme than had been anticipated.

”My understanding is that all the efforts of Government to slow them down on the decision have not been successful,” they said.

Prime Minister John Key had previously suggested the Government would work with the central bank to agree on some sort of ”carve-out” for first-home buyers.

The source said tensions between the two parties had grown as Reserve Bank governor Graeme Wheeler refused to back down.

The Reserve Bank has consistently said that creating exceptions for first-home buyers, small business owners or others, would dilute the strength of the tool.

As an independent organisation, the Reserve Bank’s sole focus is maintaining financial stability in the banking system.

This policy, like most, will create winners and losers.

It should reduce pressure on house prices, as demand will drop following less credit being available. This will benefit those wanting to buy a home that can get credit.

The losers will be those who will be unable to get a mortgage as they don’t have enough of a deposit, and they will have to remain renting for longer. Also current owners could be seen to be losers as their houses won’t appreciate so much.

LVR limits have been widely criticised by the banking and brokerage industries, who have a vested interest in unfettered lending, as well as independent groups like Consumer NZ.

Even the Reserve Bank has admitted that people are likely to sneak around the rules by borrowing a deposit from family, or lower-tier lenders.

Once the limits are imposed, banks will cherry-pick borrowers with the best credit ratings, saving histories and account conduct.

If the reserve Bank does go ahead, it will be interesting to see how effective the policy is.