Banks are expected to be able to lend more to people with small deposits. Banks are allowed to lend up to 10 per cent of their total net new lending on mortgages to people with deposits that are less than a 20 per cent.

This means that as total lending grows, the more banks will be able to lend to people with small deposits.

Mortgage lending commitments in March were the highest for any month since lending restrictions came into force in October last year. Total lending commitments increased by 36 per cent, from $5.26 billion in March compared to $3.86 billion in February, according to the Reserve Bank.

A rise to about 8 percent of total new mortgage lending to people with small deposits is expected in the next three to four months, say the Bankers' Association. This is in spite of the current bank loans to people with low deposits falling to a 3.6 percent share of new mortgage lending in March (well below the10 per cent limit).

Bankers' Association chief executive Kirk Hope said banks have been understandably cautious as abiding by the restrictions is a condition of banks keeping their banking licences.

Philip Macallister, publisher of website mortgagerates.co.nz, believes the lending restrictions killed demand by discouraging people with small deposits from even applying for mortgages. He says banks initially wanted to curb lending to such people so they may find it difficult to turn demand back on.

Source: Radio New Zealand