Proposed debt rules ‘may be too hard on property investors’

Thursday, 21 March 2024

• The Reserve Bank has been consulting on its plans for debt-to-income restrictions, which would limit how much people can borrow, compared to their household incomes.

• The central bank has said these are likely to have more of an impact when interest rates are low and the property market is running hot.

• But a broking firm says even outside the recent boom, there have been a lot of investors borrowing at levels that would exceed the planned rules.

Planned debt-to-income restrictions could hit property investors too hard, one of the country’s largest mortgage broking firms is warning.

The Reserve Bank has been consulting on its plans to introduce restrictions on how big a loan a borrower can have, compared to their household income.

It has proposed that for owner-occupiers, this limit would be six, and for investors, seven. Banks would only be able to do 20% of their lending to borrowers above that level.

John Bolton and David Cunningham, founder and chief executive of mortgage broking organisation Squirrel, said they were broadly supportive of the plan but the proposed settings for investors were significantly too restrictive.

They said there had been long periods of time in recent years, even excluding the 2021 house boom, when much more than 20% of lending to investors had been at DTIs of more than seven.

“And actually, the only time it’s been comfortably within that limit is from 2022 onwards – when many factors, including removing tax benefits on rental properties, took investors out pretty much completely. In other words, the last two years aren’t a good measure of how restrictive - or not - the proposed limits could be.

“Our concern is that a DTI of seven for this group has real potential to limit investor buying activity at all periods in the housing market cycle, so we recommended that a limit of eight would be more appropriate.”

They said that banks were conservative and were likely to implement a speed limit much lower than 20%.

Some investors could be caught out when they went to sell a property, they said.

“Like most lending restrictions, DTIs won’t just apply when you buy a property – but your situation will also be reassessed when you want to offload a property, or if you need to make other material changes to your lending.

“The concern we outlined to the Reserve Bank is around investors who weren’t subject to DTI restrictions when they bought but will then become subject to them when they sell.

“The risk here is that investors may unwittingly find themselves outside the limits, and vulnerable to the banks taking action - by claiming sale proceeds - to reduce their debt and bring them back within the DTI rules.

“If you’ve sold a property to use that money for something else, that will create a lot of pain.“

There could be an even bigger mess for borrowers whose loans were with different banks, they said.

“Because DTIs are calculated across your entire portfolio, rather than just property-by-property, if you’re over the limit with one of your lenders, you’re over the limit with all of them.”

Property investor and coach Steve Goodey said the rules could be a “gift” for high-cashflow investors who had 10 or more houses. “Not so much for first-time investors who need massive equity to buy anyway because of the LVR rules”.

But he said a lot of the impact would come down to the details in the rules and the exclusions that the Reserve Bank chose to apply.