Debt to income ratio (DTI)

New Zealand’s Debt-to-Income (DTI) Rules: What They Mean for Borrowers and Investors

As of 1 July 2024, the Reserve Bank of New Zealand (RBNZ) has implemented new Debt-to-Income (DTI) restrictions to enhance financial stability and ensure responsible lending practices. Here's a breakdown of what these rules entail and how they might affect you.

What Is a DTI Ratio?

A DTI ratio compares your total debt to your gross (pre-tax) income. For instance, if you earn $100,000 annually and have $500,000 in debt, your DTI ratio is 5. This metric helps lenders assess your ability to manage additional debt.

New DTI Restrictions

Under the new regulations:

• Owner-Occupiers: Banks can allocate up to 20% of their new lending to borrowers with a DTI ratio over 6.

• Investors: Similarly, up to 20% of new lending can go to borrowers with a DTI ratio over 7.

These thresholds are designed to prevent excessive borrowing relative to income, reducing the risk of defaults during economic downturns .

Exemptions to the Rules

Certain types of lending are exempt from these DTI restrictions, including:

• New Builds: Loans for newly constructed homes.

• Bridging Finance: Short-term loans bridging the gap between buying and selling properties.

• Kāinga Ora Loans: Government-backed loans for eligible borrowers.

• Refinancing: Replacing an existing loan with a new one.

• Property Remediation Loans: Loans for repairing or improving properties.

These exemptions aim to support specific housing needs and developments .

Impact on Borrowers

The introduction of DTI limits means:

• First-Home Buyers: May need to adjust expectations or save for larger deposits to meet DTI criteria.

• Investors: Might face constraints on leveraging multiple properties, especially in high-priced markets.

However, banks still have discretion within the 20% allowance to approve loans exceeding the DTI thresholds, considering individual circumstances .

Relationship with Loan-to-Value Ratios (LVRs)

DTI rules complement existing LVR restrictions, which limit the amount of low-deposit lending. While LVRs focus on the value of the property relative to the loan, DTIs assess the borrower's income against their total debt. Together, they provide a more comprehensive risk assessment framework for lenders .

Navigating the New Landscape

For prospective buyers and investors:

• Assess Your Finances: Calculate your DTI ratio to understand your borrowing capacity.

• Seek Advice: Consult with financial advisors or mortgage brokers to explore options within the new regulatory framework.

• Plan Ahead: Consider the impact of these rules on your long-term property investment strategies.

Understanding and adapting to these changes is crucial for making informed decisions in New Zealand's evolving housing market.

Note: This information is intended as a general guide. For personalized advice, please consult a financial professional.