LVR move stricter than predicted

[UPDATED] Loan-to-value restrictions announced today are tighter than had been expected.

Tuesday, August 20th 2013, 2:45PM

by Susan Edmunds

Reserve Bank governor Graeme Wheeler said that from October 1, banks would be required to write no more than 10% of their loans to customers with a deposit of less than 20%.

Massey University banking expert David Tripe said the market had been expecting the restriction to be to no more than 15% or 20% of lending.

He said Wheeler was right in saying that an interest rate response was not the right response to soaring house prices. But he said whether the LVR move was a good fit was up for debate. “There are a variety of ways it can be bypassed.”

Wheeler said banks would be expected not to come up with products that circumvented the rules and follow the spirit of the change. But Tripe said buyers and banks would find a way.

He said it was also not clear that buyers with high LVRs were the ones driving house prices.

In the short-term, it would mean “bureaucratic fiddling around” for banks. “But my understand is that they have cut down on lending over 80%, anyway.”

Westpac’s mortgage book grew 1.4% in the June quarter to $36.98 billion. But 99% of the $518 million increase was in loans to borrowers with a deposit of 20% or more.

ANZ reported an increase of 3% in its low-equity loans, compared to 30% in the March quarter. The bank’s residential lending increased by just over $900 million, a lift of 1.6% in the quarter ended June 30. High-LVR loans made up $29 million of that increase.

ASB was still lending significant amounts to borrowers with small deposits in the last quarter and chief executive Barbara Chapman told Good Returns that 12% - a restriction that had been discussed at that point – wold be a big step change for any bank.

Kiwibank said it would put first-home buyers at the front of the lending queue, and lend to them in preference to investors.

Chief executive Paul Brock said: "“We strongly believe that the critical issue when assessing a loan application is the ability to service the debt rather than the amount of equity a person has in the loan. Equity can be built over time and we do not want to push people out of purchasing a family home while they wait years and years to save a much bigger deposit. However to do this we will have to set priorities for our lending and first-home buyers come first."

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