What are DTIs?

There’s a new kid on the block.

Towards the middle of this year, the Reserve Bank will be introducing a brand new set of lending restrictions for home buyers, called DTIs – or debt-to-income ratios.

DTIs are basically exactly what they sound like: rules which determine the maximum you can borrow to buy a house, based on a certain multiple of your household income.

What that golden number is will vary depending on what you’re buying the house for – whether it’s to live in, or an investment property.

The new rules also give banks an allowance for lending over those limits, meaning if you’re a really credit-worthy borrower, they may be let you take out a loan for more than what’s stipulated by the DTI framework.

So, if you’re looking at buying a home from mid-2024, here’s what you need to know.

Why are DTI limits being introduced?

DTIs have been designed to help keep New Zealand’s housing market on a more even keel, and keep our financial system nice and stable.

They join the ranks of a bunch of other rules the banks need to stick to when lending to homeowners which all exist for this same purpose.

The idea is that DTIs will stop buyers from overextending themselves with their borrowing, and in doing so, that’ll reduce the chances of people going into financial stress during periods of higher interest rates, when mortgage costs spike.

By using what you earn to determine how much you can borrow, the RBNZ is also hoping to avoid another situation where house prices get wildly out of hand like they did during the pandemic – creating a whole lot of added risk for our financial system.

DTIs help prevent this scenario because incomes tend not to grow at the same rate that house prices do during a boom (wouldn’t that be nice). So, under the new limits, buyers won’t be able to increase the amount they can borrow at a pace that will support rapid price rises.

On the flip side, we should also see fewer homeowners end up in a situation where rising mortgage costs force them to sell, even at a loss – which can be a big catalyst for house prices falls.

All of that should serve to flatten out some of the big highs and lows that have defined New Zealand’s housing market over the last few decades.

DTIs will be used alongside LVRs – loan-to-value ratios – which are why you need to be able to front up with a certain percentage of a home’s value, usually 20% for owner-occupiers, as the deposit.

LVRs are largely focused on reducing risk for our financial system, ensuring buyers have enough equity that the banks can cover their losses if things go bad. DTIs also have a part to play in helping to stabilise our financial system, but they’re about protecting you as a homeowner, too.

What are the new DTI limits going to be?

There are two different settings, tailored to the two key parts of the market:

• For owner-occupiers – the proposed DTI limit is 6, meaning you’ll be able to borrow up to six times your income.
• For property investors – the proposed limit is 7, meaning you’ll be able to borrow up to seven times your income.

The reason for having different DTI settings for these groups is that property investors tend to be more resilient when it comes to rising mortgage costs, so it takes higher interest rates to tip them into financial strife.

How will the banks calculate my income?

Income includes your wages or salary, other business income (like from your side hustle), foreign income and rental income, as well as any interest payments you receive on savings and investments.

Are there any exceptions to the DTI rules?

Yep, there are.

New builds are exempt from the new DTI rules, as are homes purchased under the Kāinga Ora First Home Loan scheme. Existing homeowners will also be able to refinance their mortgage to a new lender without going under the DTI microscope, so long as the new loan is for the same amount.

Beyond that, the banks have the discretion to do up to 20% of their mortgage lending over and above these DTI limits for both owner-occupiers and property investors.

So, if you’re a really credit-worthy borrower, the banks may be willing to lend you more – as long as they haven’t already hit capacity on high-DTI lending.

Are the new DTI limits a good idea?

Broadly speaking, we’re in favour.

Used in tandem with existing restrictions, like LVRs, DTIs should be an effective and useful tool for helping to mitigate situations where borrowers are pushed to their financial limits by rising mortgage costs.

And we can probably all agree that anything which does that, while also creating a little more stability in the housing market generally, can only be a good thing.

That said, the Reserve Bank recently asked for submissions on its proposed DTI settings, and we responded, sharing our concerns some of the potential unintended consequences they may have – particularly for property investors.

If you’re interested in finding out more about our submission, you can read up on it here.

And if you’d like to understand how the new DTI limits could impact you, get in touch to have a chat to one of our friendly advisers. We’re here to help.

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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