Large mortgages require a higher risk weighting, the Insurance Council of Australia (ICA) has told the Reserve Bank of New Zealand (RBNZ).

It comes after the RBNZ proposed technical changes increasing banks’ capital requirements for high loan-to-valuation mortgages.

Responding for insurers that provide lenders’ mortgage cover in New Zealand, ICA says setting a single figure for all loans assumes that, in times of economic stress, homeowners with mortgages for most of the value of their houses will respond the same as those with a smaller loan-to-valuation ratio.

It says historical data suggests this is not the case, particularly when there is a severe drop in property prices.

The RBNZ’s consultation paper says the bank is concerned that if economic conditions worsen, borrowers most exposed to a downturn could all come under pressure at the same time, creating a severe impact on banks’ housing loan portfolios.