The Reserve Bank's latest Financial Stability Report says fewer borrowers are now falling behind on debt repayments, while borrowers who had previously been in default are finding ways to 'mitigate stress'

Household finances are becoming less stressed as interest rates continue to fall, the Reserve Bank (RBNZ) says in its latest six-monthly Financial Stability Report.

"Fewer borrowers are now falling behind on debt repayments," the RBNZ says.

"Borrowers who had previously been in default are finding ways to mitigate stress with the lower debt-servicing costs."

The RBNZ notes that longer-term arrears and impairments "have stabilised, but have not improved materially yet".

"Banks expect non-performing loans to continue to decrease over the next year,  supported by improved borrower cashflows. Instances of mortgagee sales remain low," the report says.

RBNZ figures on non-performing housing loans confirm the overall direction of distressed mortgages. The RBNZ figures show that the total of non-performing housing loans fell for the third consecutive month in September and has dropped by $185 million (to $2.272 billion).

The non-performing loans as a percentage of the total outstanding mortgage stock peaked at 0.67% in June 2025 and is now slowly falling. The peak was a long way below the 1.2% figures frequently seen in the 2009-2011 period after the Global Financial Crisis.

The country's big five banks are forecasting that this figure will be down to 0.58% by September of 2026.

A feature of the mortgage market since beginning of 2024 has been that many mortgage holders have 'gone short' and either switch to floating rates or short term fixed rates in the anticipation that the RBNZ would be lowering the Official Cash Rate. The RBNZ did duly start dropping the OCR from the peak level of 5.5% in August of last year and the rate is now down to 2.50%, with universal expectation that it will be further dropped to 2.25% at the last rate review for this year on November 26.

Now the RBNZ is noting that mortgage borrowers "continue to shift from relatively high floating rates to lower fixed rates, as expectations increase that the OCR is nearing its trough in the current cycle".

"Mortgage borrowers are switching lenders more often to seek more favourable lending terms. Lenders are competing more aggressively for borrowers. Banks have continued to reduce their serviceability test rates for new borrowers as mortgage rates have declined."

'Elevated housing inventories in Auckland and Wellington weigh on house prices'

The RBNZ says house market activity has picked up from its low point in 2023, supported by lower interest rates and policy changes.

"National house prices remain around 12% below their November 2021 peak and have been broadly flat over the past three years.

"Elevated housing inventories in Auckland and Wellington are weighing on house prices, reflecting the soft labour market and low net migration, and offsetting stronger house price growth in parts of the South Island."

The RBNZ does say, however, that house prices "remain near the top of our range of sustainable estimates".

It says though that its assessment is that risks associated with new mortgage lending are "contained".

"New mortgage lending with relatively high debt-to-income (DTI) ratios and loan-to-value ratios (LVR) has picked up but remains low.

"Overall housing credit growth remains subdued as well. The DTI restrictions we introduced in July 2024 act as a guardrail to constrain the share of highly indebted lending if housing credit demand rises materially."

Easing of LVR restrictions

The central bank commented on the proposed easing of mortgage LVR restrictions from December 1, 2025, which will see the owner occupier 'speed limit' raised to 25% from 20% for lending with an LVR above 80% and the investor 'speed limit' raised to 10% from 5% for lending with an LVR above 70%.

(Note: the term 'speed limit' refers to the upper limit of new bank lending that can be done at high LVRs, so, for example the new 25% limit means the banks are limited to lending a maximum of 25% of new mortgage money at LVRs in excess of 80%)

The RBNZ says the introduction of debt-to-income (DTI) restrictions last year means LVR settings can be less restrictive on average.

"This includes looser default settings that we expect will be in place most of the time, except for when risks are particularly elevated," the RBNZ says.

"While the likely impact of this easing on the housing market will be small, it will give banks slightly more flexibility. Over time, we expect this will help minimise the unintended impacts of the policy and support access to credit."

The RBNZ says low levels of net migration and a soft labour market continue to restrain housing demand. Falling rents and low expectations of capital gains are weighing on investor demand, although the reinstatement of interest deductibility for tax has provided some support.

'Financial stability risks do remain higher than in recent years'

In releasing the latest report, Reserve Bank Governor Christian Hawkesby said financial stability risks do remain higher than in recent years.

"Fragmentation of global trade and finance, and ongoing uncertainty continue to present risks. Elevated global equity valuations, in areas such as tech stocks, and growing government debt levels in many advanced economies are also vulnerabilities. As a small open economy, New Zealand would be exposed to any impacts on global economic activity or volatility in financial markets," he said.

"Underperformance in parts of the New Zealand economy such as retail and hospitality is creating challenging conditions for households and businesses. Loan defaults have picked up, although they remain low compared to during the Global Financial Crisis. Lower interest rates and high commodity prices are supporting some sectors, including agriculture.

"Banks remain well placed to manage the current uncertainty. Strong lending standards, including loan-to-value limits, have helped to restrict the amount of high-risk lending in the system," Hawkesby said.