Lending limits: How they could affect bank mortgage books

Banks are waiting to see what impact new lending restrictions could have on their mortgage books if interest rates fall, but expect it will be limited with high interest rates already acting as an affordability proxy.

“We’ve got changes in interest rates potentially coming up, we’ve got these changes in regulations, it’s a really interesting time to see how this is going to play out,” Bank of New Zealand general manager of home lending James Leydon told Markets with Madison.

Banks had spent the past year preparing for the new restrictions imposed by the Reserve Bank of New Zealand last week, with the intent of protecting the financial system from risky lending when interest rates decline.

The new debt-to-income (DTI) limits mean banks could have only 20 per cent of their total mortgage book made up of loans more than six times an owner-occupier’s annual household income before tax, and seven times for a property investor.

The related easing of loan-to-value ratio (LVR) restrictions allowed banks to lend slightly more to borrowers with small deposits.

Leydon said the latter could benefit property investors, but the fresh debt-to-income limits could have the opposite effect, especially when interest rates begin to drop.

“But, in this environment, we’re not seeing that as an issue.”

Comparatively high interest rates had already acted as a sort of speed limit, he explained.

“So that really impacts a customer’s ability to service a loan. What you’ve seen is that maximum borrowing capacity shrink.”

“[There will be] ongoing monitoring of our book to understand what’s happening.”

The limits could mean the size of mortgages banks would be issuing from now on would be smaller, effectively reducing how much interest they earned.

But Leydon said he welcomed the changes.

“The reality is, we’re in a regulated environment.”

Banks made the most of the low-interest-rate environment last time, with new loans above six times a borrower’s income most prominent in 2021, according to the Reserve Bank’s recent financial stability report.

• Watch James Leydon discuss the state of BNZ’s $57 billion mortgage book in today’s episode of Markets with Madison above.

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Disclaimer: The information provided in this programme is of a general nature and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

Madison Reidy is host and executive producer of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.