LVR rules tweaked

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Banks will have to check where a home loan deposit has come from under new rules being proposed by the Reserve Bank - but will not have to worry about a customer’s credit card debt.

Sunday, December 29th 2013, 9:03PM 1 Comment

by Susan Edmunds

It has released another consultation paper on the loan-to-value (LVR) restrictions, explaining the terms of its exemption for new builds and clarifying that – in most cases – customers’ non-mortgage debt will not be counted in the LVR of their mortgage.

Since October, banks have had to keep their new lending to borrowers with deposits of less than 20% to no more than 10% of their loan books.

The Reserve Bank wants customers to operate within the spirit of the rules and not get around them by using personal loans or other products to produce a 20% deposit.

There had been concerns that would drive it to instruct banks to assess customers on their total borrowing, rather than just the home loan portion. Banks said that could prompt customers to take their credit card business elsewhere.

But the Reserve Bank says including credit card debt in LVR calculations is not its preference at present.

It says it would prefer to introduce a deposit identification and verification requirement, prohibiting banks from lending to borrowers when it knows their deposit is funded by unsecured lending.

It said this would allow banks to continue to offer products to mortgage customers without them being counted in a customer’s LVR, so they are not disadvantaged relative to other banks in competing for that customer’s business.

NZ Home Loans chief executive Mark Collins said that would be a relief to the banks.  “That’s one of their big cross-sell products. But it won’t affect the broker market at all because where they put their credit card is irrelevant to what a broker does. But for banks, it was a biggie for them.”

He said it seemed significant that the Reserve Bank was taking a more liberal approach to the restrictions already. “They were quite bolshy early on, saying they wouldn’t change anything until they saw a difference but we’ve already seen two changes. Either they’re bowing to pressure or they’re already seeing a change.”

Westpac’s head of retail, Ian Blair, said the Reserve Bank’s statement aligned with the approach the bank was already taking.

The Reserve Bank also wants to add another item to the potential avoidance measures, to stop customers leaning too heavily on non-mortgage consumer debt to avoid topping up their home loans.

It has warned that if the feedback in consultation is that the proposed anti-avoidance clause and data collection are unworkable, it will look again at including non-mortgage debt in a customer’s LVR calculations.

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