In future only investors with hefty deposits will qualify for mortgages to acquire property in New Zealand under tough new restrictions that have been introduced in the country.

Property investors will now need a 40% deposit to acquire property with a mortgage as part of new rules are being urgently introduced in an attempt to put a cap on New Zealand’s spiralling property prices.

The new loan-to-value ratios (LVRs) will officially come into play on 1 September, but the Reserve Bank’s Governor Graeme Wheeler has told banks that he wants them to “observe the spirit of the new restrictions” immediately.

According to the new rules, banks will be forced to require a 40% deposit – up from 30% – for at least 95% of the investment-related loans they make.

“Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending,” said the Reserve Bank’s deputy governor Grant Spencer.

He added: “A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country.”

Some experts now fear that the need to raise a higher deposit will deter some property investors from investing further in the residential property market, particularly the buy-to-let sector, which would add to the supply shortage of rental home in parts of the country, particularly in Auckland. 

You can read the Reserve Bank’s consultation paper on proposed loan-to-value restrictions by clicking here.