What will new debt-to-income rules mean for you?

Tuesday, 28 May 2024

The Reserve Bank has introduced restrictions on the amount of high debt-to-income lending banks can make.

The Reserve Bank has changed the rules for retail bank mortgage lending.

The central bank on Tuesday announced the introduction of long-expected debt-to-income ratios (DTIs) and the loosening of loan-to-value ratios (LVRs).

If the acronyms are all Greek to you, here’s the plain English version.

What are debt-to-income ratios anyway?

CoreLogic head of research Nick Goodall says the best guess is that future debt to income ratio restrictions for home buyers will restrict lending to six times a borrower's income.

Pretty much exactly that ‒ the amount of debt a borrower has taken on relative to their gross, or pre-tax, income.

If you’ve borrowed four times your income, you have a DTI ratio of four. If you’ve borrowed eight times your income, your DTI ratio is eight. Simple.

And what is the Reserve Bank doing with them?

The bank is limiting the amount of high-DTI lending banks can make.

From July 1, banks will be able to make 20% of new owner-occupier lending to borrowers with a DTI ratio over six and 20% of new investor lending to borrowers with a DTI ratio over seven.

What does that mean for borrowers?

At those ratios, owner-occupiers with a gross annual income of $126,411 (the current household average) would be able to borrow up to $758,466. An investor with the same income could borrow $884,877.

Owner-occupiers with an income of $75,000 would be limited to $450,000, and investors on the same income could borrow $525,000.

Those on the minimum wage of $48,152 would be restricted to borrowing up to $288,912.

What about loan-to-value ratios? What are those?

LVRs limit the amount of low-deposit lending banks can offer.

At the moment, 15% of new lending can go to owner-occupier borrowers with less than 20% deposit. From July 1, banks will be able to make 20% of that lending to low-deposit borrowers.

The limit on low-deposit lending to investors will stay at 5%, but the required deposit will drop from 40% to 35%.

And how will that affect borrowers?

Commentators don’t expect it to make a huge difference, although it could make things a easier for first home buyers, who often find it harder to get a deposit together.

Why are the changes being made at the same time?

RBNZ deputy governor Christian Hawkesby said DTIs and LVRs work together to reduce the build-up of high-risk lending.

“LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn, while DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt,” Hawkesby said.

“Having both DTI and LVR restrictions in place at the same time means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system.”