Are interest-only lending limits now less likely?

Reinstated loan-to-value ratio restrictions and the Government's housing reforms could make interest-only lending curbs less likely, according to a new report.

Kelvin Davidson, a senior economist at CoreLogic, says there are "clear signs" that the reintroduction of LVR rules has "dampened investors' buying activity", with a sharp drop in >70% LVR lending to investors since the rules were announced in February.

High LVR lending has fallen rapidly, but remains above pre-Covid levels, according to CoreLogic's analysis. 

With the first of the Government's radical housing reforms already in place, such as the tapered removal of interest deductibility and the extended bright-line test, Davidson believes interest-only limits are less likely.

According to Davidson, the interest deductibility changes will reduce demand for interest-only lending, with larger equity stakes becoming more important under the new rules.

With investors adjusting their portfolios to reduce debt under the new regime, interest-only curbs may not be required, he says.

"So we suspect that the chances of further regulation in the form of caps on interest-only (I-O) lending have significantly reduced, not least because equity is now king from a borrower’s perspective, so there may not be as much demand for I-O loans anyway."

Ministers and the Reserve Bank of New Zealand are reviewing whether interest-only lending poses a risk to financial stability.

The central bank is expected to report back on the subject in the next few months.

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