RBNZ confirms higher capital for investor loans

The Reserve Bank of New Zealand has issued its final policy decision confirming higher capital requirements for rental property mortgages, although it has extended the transition period for reclassifying the mortgages for 12 months to October 1, 2016.

The central bank and prudential regulator issued its final decision and a regulatory impact statement late on Friday, having given the broad outline of its plan earlier in the month, along with a separate move to ban rental property investors from borrowing more than 70 per cent in the Auckland market.  

It also confirmed it would assess the risks of reverse mortgages at a later date.

The RBNZ rejected arguments from major banks that New Zealand's lending standards were better than the standards in the UK and Ireland cited by the Reserve Bank when arguing for the changes. The RBNZ hopes the moves will reduce the financial stability risks of any potential downturn in house prices.

The RBNZ said banks had estimated in their submissions that the proposed changes to the categorisation of loans to separate out rental property loans from owner-occupier loans would cost from NZ$250,000 to NZ$500,000 million each for smaller banks and between NZ$1.3 million to NZ$5 million for larger banks.

"Costs were a result of necessary changes to IT systems, staff training, the creation of new products within the new asset class, and changes to documentation and internal processes," the Reserve Bank said. "Additionally, banks would need to assign staff and resources to the reclassification of existing loans during the transition period," it said.

"In this case, it believes that the benefits of greater differentiation and visibility of credit risks within banks' systems exceed the costs of implementing the changes, and will allow the Reserve Bank to apply appropriate capital requirements for property investment loans and implement macro-prudential policy."

The bank ruled that risk weighting for capital adequacy purposes would be 40 per cent for rental property loans with a loan-to-valuation ratio of less than 80 per cent, whereas it would remain at 35 per cent for owner-occupier loans.

Risk weightings for rental property loans with LVRs of over 80 per cent ranged from 50 per cent to 90 per cent, depending on the level of the LVR and whether there was mortgage insurance. The weighting was between 15 to 25 percentage points higher for rental property mortgages than owner occupied mortgages in these categories.

The RBNZ did not estimate the likely increased capital requirements from the changes, although banks estimated from modeling done on the initial proposals that up to NZ$500 million extra capital would be required, which could increase interest rates for rental property loans by five to ten basis points.