(Adds details, background and comment from deputy governor)
WELLINGTON, April 30 (Reuters) - The Reserve Bank of New Zealand (RBNZ) said on Thursday that it would remove mortgage lending restrictions for 12 months as a response to the economic downturn caused by the coronavirus pandemic.
The decision to remove mortgage loan-to-value ratio (LVR) restrictions was made to ensure it didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to COVID-19, RBNZ said in a statement.
The bank had proposed easing mortgage restrictions last week and said it would consult on the proposal for seven days.
It said views on the proposals were mixed, but all locally incorporated banks which responded were in favour of removing the LVR restrictions.
Of those against such a move, many were concerned about potential adverse impacts on financial stability, such as the risk of bank failure, the statement said.
“Given the current uncertainty around the economic outlook, the Reserve Bank considers that it is unlikely that banks will weaken lending standards to high risk borrowers,” Deputy Governor Geoff Bascand said in the statement.
“The more likely risk is that banks are overly cautious with lending to credit-worthy borrowers.”
The decision will be effective as of 1 May.
Under LVR restrictions banks could make up to 20% of their residential mortgage lending to owner-occupiers who have paid deposits of less than 20%. No more than 5% of residential mortgage lending could be to investors with deposits of less than 30%.
By improving the equity positions of mortgage borrowers it is likely that a significantly smaller number of borrowers will have to sell their houses or default on their mortgage as a result of the current economic shock, RBNZ said.
Reporting by Praveen Menon; Editing by Kim Coghill