Bad news for borrowers

Anyone who was hoping for looser loan-to-value rules to make it easier to get a mortgage has been disappointed.

Economists had predicted that the Reserve Bank would use its November financial stability report to ease the restrictions.

They currently require banks to lend no more than 20 per cent of new lending to owner-occupier borrowers with a deposit of less than 20 per cent and no more than 5 per cent of lending to investors with deposit or equity of less than 30 per cent.

Reserve Bank governor Adrian Orr said those restrictions had been successful in reducing ‘‘more excessive’’ household mortgage lending, which improved the resilience of banks if they faced significant deterioration in economic conditions.

Although since relaxed, the rules were credited for slowing investor activity considerably, particularly in Auckland.

Despite a drop in house price inflation and more cautious lending from the banks, Orr said the time was not right to relax the loan-to-value rules further.

Orr said a period of prolonged low interest rates could lead to a surge in high-risk lending.

The report noted that indebtedness in the household sector was high.

There has been a drop in the proportion of new lending issued with debt-to-income ratios of more than five, which means that they are borrowing an amount equal to more than five times the household’s income.

About 40 per cent of new lending is now in that category, compared to nearly 50 per cent in 2016.

‘‘High debt leaves borrowers exposed to cash flow stress in the event that interest rates rise or incomes fall. Banks could experience significant losses if a large number of borrowers became stressed in an economic downturn, particularly if this were accompanied by a significant fall in house prices,’’ the report said.

‘‘Restrictions on high loan-tovalue ratio mortgages are in place to limit the amount of high-risk lending and thereby reduce the vulnerability of banks from a severe downturn affecting the household sector.’’