Debt-to-income controls to kick in on July 1
Tuesday, 28 May 2024
The Reserve Bank has confirmed it is activating debt-to-income (DTI) restrictions on mortgage lending, and they will be operating by the middle of the year.
DTIs limit the amount that someone can borrow in relation to their income, and they are intended to prevent, and are intended to help moderate the housing market.
Their introduction has been on the cards for some time, and the Reserve Bank consulted on their settings earlier this year, but the housing market downturn meant there was less urgency around them.
Now, the Reserve Bank has announced that from July 1 only 20% of banks' new lending will be able to go to owner-occupiers with a DTI ratio of over 6, and only 20% of new investor lending can have a DTI ratio of over 7.
That means an owner-occupier with an annual income before tax of $100,000 could borrow up to $600,000, while an investor could borrow up to $700,000 for a house purchase without being impacted by the restrictions.
At the same time the DTIs come into force, the Reserve Bank will loosen loan-to-value ratios (LVR), which limit the amount of low-deposit lending banks can make.
Reserve Bank deputy governor Christian Hawkesby said DTIs reduced the probability of mortgage defaults by targeting the ability of borrowers to continue to repay debt.
LVRs targeted the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn, he said.
“Both act as guardrails reducing the build-up of high-risk lending in the system.
“Having both the DTI and LVR restrictions in place 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.”
Activating DTIs meant it was possible to ease LVR settings too, he said.
The relaxing of the LVRs will allow banks to make more low deposit loans.
Currently, 15% of bank lending can go to owner-occupiers with LVRs above 80%, and 5% can go to investors with LVRs above 65%.
From July 1, 20% of banks’ new lending will be able to go to owner-occupiers with an above 80% LVR, and 5% to investors with LVRs above 70%.
Hawkesby said the DTI restrictions would include an allowance for banks to do 20% of their lending outside of the specified limits.
“This will improve efficiency by letting banks exercise their own discretion and manage complex cases.”
In 2021, Finance Minister Grant Robertson agreed DTIs could be introduced, but only after public consultation, and in 2022 the Reserve Bank announced it would be going ahead with them.
Last year banks were given 12 months to prepare their systems for their possible implementation, and mortgage advisers started to alert borrowers to what they would mean.
CoreLogic chief property economist Kelvin Davidson said the DTIs are a big deal.
While the introduction of formal caps on DTIs might not do much straight away, the new rules would mark a big landscape shift as mortgage rates declined, he said.
“That’s primarily by slowing down the rate at which property investors can grow a portfolio, especially in more expensive areas.”
Westpac senior economist Satish Ranchhod said as house price levels relative to income varied across the country, once DTI’s became binding in high price regions, they might incentivise investors from higher income regions to invest in lower price regions.
Lower prices compared to incomes would make it easier to jump the DTI hurdle, he said.
“Very highly priced regions, such as the Queenstown Lakes region, would be disincentivised for both first home buyers and investors. Over time, this may influence investment flows and regional house price trends.”
But the DTIs should have little immediate impact on the housing market, and did not change Westpac’s forecast for price growth, he said.