The Reserve Bank is looking to revamp its rules for retail bank mortgage lending.

It plans to bring in the long-expected debt to income ratios (DTI) but ease the loan to value ratios (LVR) as a way of reducing risks to the financial system from property lending.

Deputy Governor Christian Hawkesby said the controls would better manage the risk of boom and bust in the finance system.

“We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies.”

DTI restrictions set limits on the amount of debt borrowers can take on relative to their income, and are designed to reduce the probability of financial system weakness triggering a wave of borrowers defaulting.

The decade-old LVR restrictions are aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage.

The RBNZ was proposing the debt to income ratio for owner-occupiers would be six, and for investors seven times their income.

On that basis owner occupiers would need $100,000 income for a loan of $600,000 and investors $100,000 for a $700,000 loan.

Lending banks would be allowed to have no more than 20% of their new lending above that level for owner occupiers.

At the same time loan to value limits would be eased to allow banks to lend to a maximum 20% of owner occupiers with deposits of 20% or less the value of a property, and 5% of their lending to investors with a deposit of 30% or less.

Hawkesby said the limits would still give banks the discretion to lend to low deposit customers, and the new DTI mechanism would better suit first home buyers, who might be able to service a large loan but who might struggle to raise a deposit.

He said the housing market was now at a more sustainable level after last year’s decline.

rnz.co.nz

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