New checks on mortgages in at least a year

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Additional mortgage checks designed to keep homebuyers from going into debt over their heads are expected to be over a year away.

The Reserve Bank has been consulting on introducing debt-to-income ratio restrictions that would cap the amount homebuyers could borrow relative to their income.

The controls would complement existing loan-to-value ratio rules that limit the amount banks can lend to homebuyers in proportion to the price of the homes they buy.

Both controls have the general effect of forcing home buyers to have higher deposits or pay less for homes, but can impact people to varying degrees, depending on their financial situation, with always great potential for overlap.

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The Reserve Bank has previously suggested it could cap the amount borrowers can spend on a home at seven times their gross income.

But with house prices falling and mortgage rates rising, the urgency for new controls on mortgage lending appears to have lessened.

The Reserve Bank has said it expects to see a reduction in new lending at high debt-to-income (DTI) ratios in the coming months anyway, as banks raise hypothetical interest rates that they use to calculate borrowers’ ability to repay their loans under more adverse future circumstances.

But he said DTI checks were still an important additional tool to “reduce risks to financial stability and support the sustainability of house prices” and would fill a gap not covered by existing regulations.

The Reserve Bank expects to see a reduction in risky lending as interest rates rise, but is pushing ahead with plans for new controls on mortgages next year.

Liz McDonald / Stuff

The Reserve Bank expects to see a reduction in risky lending as interest rates rise, but is pushing ahead with plans for new controls on mortgages next year.

Deputy Governor Christian Hawkesby said the central bank plans to put in place a framework for DTI controls by the end of this year, “so that restrictions can be introduced by mid-2023 if necessary” .

The Reserve Bank had previously said it expected banks to be ready to implement regulated DTI limits by the end of this year.

He said he currently sees no need for an interim measure that would put a floor on the hypothetical interest rates used by banks to test borrowers’ ability to withstand future rate hikes.

But he was monitoring the situation closely “and does not rule out imposing a test rate floor if the risks to financial stability warrant it”, he said.

Finance Minister Grant Robertson has asked the Reserve Bank to consider the impact the new controls could have in making it harder for first-time buyers to finance a home purchase.

Hawkesby said imposing caps on mortgage debt as a proportion of borrowers’ income would have less of an effect on first-time homebuyers than setting a floor on the hypothetical interest rates used by banks. in their viability tests.

Indeed, investors tend to borrow at higher DTIs than other borrowers, he said.

The Reserve Bank has also previously suggested that DTI controls could benefit first-time home buyers overall by “supporting sustainable house prices and dampening investor demand”.

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