As of 1 July 2024, Debt-to-Income (DTI) restrictions have been introduced as an additional affordability check for lenders to complete when assessing whether to approve a mortgage application.
The introduction of DTI is intended to balance the simultaneous easing of the Loan-to-Value Ratio (LVR) restrictions. The DTI restrictions control the amount of high-debt-to-income lending banks can offer, while the LVR restrictions control the amount of low-deposit lending.
Is this good news or bad news?!
While adding DTI restrictions may sound like another hurdle to jump to get a mortgage, we believe these changes are a game-changer for the housing market! The introduction of DTI restrictions has enabled the lower LVR limits. The reduced LVR limit is an exciting development for first-time home buyers with smaller deposits, giving them a better chance to enter the market. It’s also an enticing opportunity for property investors to return to the field.
What are the DTI restrictions?
DTI ratios are calculated by the total debt divided by the total gross income.
The Reserve Bank of New Zealand (RBNZ) has introduced a DTI of six. Lending over that ratio is restricted. Under the restrictions, banks can allocate:
- 20% of new owner-occupier lending to borrowers with a DTI ratio over 6.
- 20% of new investor lending to borrowers with a DTI ratio over 7.
There are some exemptions where the DTI rules don’t apply, including (but not limited to):
- Portability – i.e. when selling and buying, you keep your mortgage but change the property.
- Refinancing – where the new loan value doesn’t exceed the original loan value.
- Kāinga Ora loans
- Bridging finance
- Property remediation (e.g. leaky home).
What are the LVR restrictions?
LVR restrictions were introduced as a speed bump for the amount of low-deposit lending done by the banks.
New LVR limits mean banks can allocate 20% (previously 15%) of their lending to owner-owner-occupiers with an LVR over 80%. They can also lend an additional 5% of investor lending, to borrowers with an LVR of 70% (previously 65%).
Why does the RBNZ think New Zealand needs DTIs and LVRs?
DTI and LVR restrictions are intended to reduce the likelihood of a financial crisis by stopping excessive lending during booms and ensuring banks and households are more resilient during busts.
RBNZ Deputy Governor Christian Hawkesby summed up the need for both DTIs and LVRs, explaining, “LVRs target the impact of defaults by reducing the number of potential losses in the event of a housing downturn, while DTIs reduce the probability of default by targeting the ability of borrowers to continue repaying debt.”
“Both act as guardrails, reducing the build-up of high-risk lending in the system.”
By having both restrictions in place, the government can better respond to the different risks they are designed to address.
If you’re unsure of what these changes mean for your mortgage potential, don’t worry! That’s what Mortgage Advisers are for. Get in touch today; we can identify your options and help you get the lending you need.