Due to Covid-19, the Reserve Bank gives up on its previous reluctance to ease loan to value rules and pledges to remove them for at least a year. Bernard Hickey reports

Having repeatedly pledged to keep loan to value (LVR) restrictions in place for nearly seven years before the Covid-19 crisis, the Reserve Bank has announced a surprise proposal to completely remove them on mortgage lending for at least a year. There will be just seven days consultation.

The central bank, which also regulates banks, insurers and other deposit takers such as building societies, put them in place in 2013 under previous Governor Graeme Wheeler to try to slow down risky lending to first home buyers and landlords. These borrowers were taking out loans worth more than 80 percent of the value of properties as house price inflation surged and interest rates fell. The restrictions limited the proportion of lending at more than 80 percent LVRs.

Wheeler argued then and in subsequent tightenings of the LVR rules that they were needed to strengthen the banking system and reduce the risk of home owners being caught ‘under water’ with mortgages worth more than their houses in the event of a fall in house prices.

But now, with prices expected to fall, the LVR rules could stop banks from lending more to borrowers who need to defer mortgage payments or small businesses using the equity in their homes to keep their businesses going.

The Reserve Bank said the LVR requirements were one of the macro-prudential tools that it had available to respond to cyclical pressures.

“LVRs were introduced as a macro-prudential financial stability tool in October 2013 and have been adjusted over time. Adjusting the use and calibration of macro-prudential tools in response to economic conditions is how they are intended to be used,” Deputy Governor and General Manager of Financial Stability Geoff Bascand said.

This move would help banks to keep lending to support customers, including those with mortgage deferrals, he said.

Bascand said consultation would be open for seven days and a decision made promptly.

The change would be via a change in bank Conditions of Registration. It said it would monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the Covid-19 pandemic became clearer.

“After that period, we will review whether to reinstate LVR restrictions. This provides banks and customers certainty that no further changes to LVR requirements will be made for at least one year.” 

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