No debt-to-income controls on housing before at least March 2024

Wednesday, 9 November 2022

CoreLogic head of research Nick Goodall describes some of the things that could make the property market downturn worse. (Video first published on November 1, 2022)

The Reserve Bank says it is not likely to impose debt-to-income controls on mortgage lending before March 2024 at the earliest.

But if it did press ahead with such controls, it said as an example in a consultation document that it could prevent banks from issuing more than 20% of their new home loans to customers who had a debt-to-income (DTI) ratio of more than seven.

That would suggest that borrowers who had an annual income before tax of $100,000 might normally be able to borrow up to $700,000 for a house purchase without being impacted by the possible restrictions.

However, the actual caps that would apply and the proportion of mortgage lending that banks could do outside of that limit is not something that the bank is currently consulting on.

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The Government agreed to give the Reserve Bank the power to set debt-to-income (DTI) controls on bank lending in June last year at a time when concerns about runaway house prices were near their peak.

Finance Minister Grant Robertson said then that was on the condition that the Reserve Bank designed any rules, as far as possible, to avoid impacting first-home buyers

However, the need for DTI controls appears to have become less pressing as a result of a sharp pull-back in house prices this year.

The Reserve Bank has separate loan-to-value controls on the proportion of lending banks can offer to home buyers making only small deposits on their home, relative to the amount they are borrowing.

The central back said in its consultation document the remaining time needed for consultations and for banks to train their staff and prepare their systems for DTI restrictions meant “the earliest possible implementation date” for them was likely to be March 2024.

It also set out more thinking on the technicalities of how the controls could work.

It suggested banks should be able to count all forms of income that could be used to service a debt when making DTI calculations including, where applicable, people’s rental incomes and business incomes.

However, all debts that borrowers had would also need to be included in the calculation, including credit card debt, personal loans and student loans, as well as the mortgages they were taking on.

The Reserve Bank is seeking submissions on its proposals by December 14.