Low Equity Home Loans Surge, Reserve Bank Keeps Tight Grip

The Reserve Bank of New Zealand is keeping an eye on low equity home loans, which have been surging in recent years. According to data from the major banks' general disclosure statements, ANZ New Zealand has 9.3% of its total home lending as loans where the borrower has less than 20% equity, up from 7.5% a year earlier and 6.2% five years ago.

Kiwibank's low equity lending is up to $3.8 billion, or 11.2% of total home lending, from 8.6% a year earlier, while Westpac NZ's is 10.6% of total lending, up from 7.2% five years ago.

The Reserve Bank has maintained its LVR restrictions on banks' housing lending unchanged, despite the surge in high LVR lending. The current rules allow up to 25% of a bank's new lending to have an LVR above 80%, and up to 10% for investors with an LVR above 70%.

However, it's unclear where the Reserve Bank gets uncomfortable when it comes to low equity lending levels. The Reserve Bank has stated that it would not be comfortable seeing high LVR lending reach levels seen in 2012-13, when some banks had more than 70% of their net home loan growth coming from lending with less than 20% deposit.

Low equity loans come with risks to borrowers, lenders, and the financial system as a whole. Borrowers may face negative equity if the value of the property drops, while lenders may face higher default rates and losses.