Starting July 1, 2024, banks in New Zealand will need to comply with new debt-to-income (DTI) restrictions set by the Reserve Bank. These rules apply to new lending for residential homes, impacting both owner-occupiers and investors.
What is DTI?
DTI, or debt-to-income ratio, is a metric lenders use to evaluate a borrower’s ability to repay debt. It compares the borrower’s total debt to their gross (before tax) income. While some banks already use DTI assessments for home loan applications, the new rules will standardise these assessments across all banks.
These DTI rules add to the existing loan-to-value (LVR) rules, which limit the amount of low-deposit lending banks can undertake.
New DTI Restrictions
Under the new DTI rules, banks can lend:
Up to 20% of their owner-occupier loans to borrowers with a DTI ratio greater than 6.
Up to 20% of their investor loans to borrowers with a DTI ratio greater than 7.
These "speed limits" permit a portion of banks’ lending to exceed the DTI thresholds, allowing for some high-DTI lending.
High-DTI Borrowing Explained
Borrowing is considered high-DTI if it exceeds the specified thresholds:
For owner-occupiers: Borrowing more than 6 times the gross income, minus any existing debt.
For investors: Borrowing more than 7 times the gross income, minus any existing debt.
Why Are DTI Rules Needed?
The Reserve Bank's mandate includes maintaining the stability of New Zealand’s financial system. DTI restrictions, a type of macroprudential tool, help ensure banks do not engage in overly risky lending practices, particularly during economic booms. This precaution helps prevent a wave of defaults during downturns. DTI rules complement other tools, like LVR restrictions, by addressing different risk aspects.
Exemptions to DTI Rules
There are several exemptions to the DTI restrictions, including:
Kāinga Ora loans.
Refinancing an existing mortgage, provided the new loan value does not exceed the original loan value.
Portability of home loans, where the loan is transferred to a new property without increasing the loan amount.
Bridging finance.
Property remediation, such as for leaky homes.
Construction loans, which apply to building a new home, purchasing a newly built home within six months of completion, or buying a home through the Government’s KiwiBuild programme.
These changes aim to balance responsible lending with the needs of home buyers, helping maintain a stable and secure financial environment for all New Zealanders.
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