Learning About DTI And Its Impact
Interest rates are on the increase, and the subject of debt-to-income ratios (DTIs) keeps popping up. So what is this? What does it mean for mortgages in New Zealand. We lay it all out for you in our article below.
What are debt-to-income ratios?
It’s a calculation to decide how much someone can borrow. The limit a person can borrow is decided by a simple calculation using their income.
How is DTI calculated?
DTI is calculated by taking the yearly income of the applicant/s and multiplying it by x to determine the maximum number they can borrow. For instance, if the debt-to-income ratio was set at 6 and the applicant/s earns $150,000 a year then they could borrow up to $900,000.
How are debt-to-income ratios used in New Zealand?
In 2021 the Reserve Bank was given the power to dictate DTI ratios to the banks and other lenders. They haven’t yet acted on this power. They don’t have immediate plans to do so and would go through a consultation process. Use of debt-to-income ratios, according to the government, would be focused at investors rather than homeowners.
While there isn’t yet an obligation to use debt-to-income ratios, some of the major banks have gone ahead and implemented their own DTIs. Other lenders have indicated that they may do the same.
How would debt-to-income ratios be different from current measures?
Currently, the borrowing limit is usually determined using loan-to-value ratios (LVRs). The size of the deposit determines the amount that can be borrowed – to a point. Lenders each have their own complicated affordability calculators. They use this to determine how much money a person could responsibly borrow. Income no doubt plays a main part in this calculation.
So, what does this all mean for borrowers?
In general, the purpose of DTIs is to ensure responsible lending, and to reign in the housing market. While this may limit people’s borrowing options, the aim is that this will keep prices in check. But what it means for you depends entirely on your circumstances.
As a consumer, it’s great to have an understanding of concepts such as debt-to-income ratios. Your mortgage is likely the biggest financial responsibility you’ll ever have so knowing how it works is valuable.
The key however, is to not get bogged down by financial policies and their possible ramifications for your ability to borrow. It’s our job as mortgage brokers to be across the current lending rules and policies. We’re then able to give you advice on how much you can borrow and which lender is best for you. Contact us to find out how we can help you.