8 Apr 2013

Support for planned loan-to-value mortgage changes

6:56 am on 8 April 2013

Credit ratings agency Moody's supports plans by the Reserve Bank to hold more capital against high loan-to-value mortgages.

The Reserve Bank is seeking feedback on a suite of new tools to dampen the risk of a credit boom damaging the financial system, while they may also support the use of interest rates to influence behaviour and tame inflation pressures.

Auckland's surging property market is considered an emerging risk, and restricting loan-to-value ratios, or LVRs, above 80%, is being heavily touted as a relatively quick fix to deal with excessive credit, or asset price, growth.

While the major retail bank's worry that such a move could hinder the chances of first home buyers getting a loan, Moody's analyst Daniel Yu said it will improve the sector's creditworthiness.

He said that insisting the banks hold more capital against high LVRs should push up mortgage rates and curb an overheating housing market.

Mr Yu said making the banks hold more capital against each loan they make at high LVRs will provide a larger buffer that the banks can use to absorb losses that could come through any of these loans.

He said forcing banks to hold more capital raises the cost for them to lend these types of mortgages and this is a cost which could be passed onto customers which could potentially slow down some of the housing market's strong momentum.

Mr Yu said slowing down the housing market's momentum could potentially help reduce increasing house prices.

He said the Reserve Bank estimates the capital that banks hold for all housing loans will increase by 14% or 23% on average, on top of their already high capital buffers.