Advice matters
What you need to know about debt-to-income ratios

The Reserve Bank has indicated that it wants to introduce debt-to-income ratios for home loan borrowers.

These would limit the size of the loan that people could take out, compared to their household income. Here’s what you need to know.

What are the limits likely to be?

The Reserve Bank has been consulting on a proposal to allow banks to lend only 20% of their new residential loans to owner-occupiers with a debt-to-income ratio of more than six, and 20% of their loans to investors with a debt-to-income ratio of more than seven.

It plans to ease loan-to-value restrictions at the same time.

The Reserve Bank said it planned to exempt newly constructed dwellings and Kāinga Ora loans. The rules will also not apply to loans for commercial property.

What would this mean for the property market?

Data collected by the RBNZ indicates that very little lending has been done at levels that would exceed the debt-to-income ratios proposed, so the impact of the rules on the market would be minimal.

But in environments where interest rates are low, and people are borrowing larger amounts, it could have more of an impact. It is expected that it could help to moderate the speed of a future house price peak.

The Reserve Bank said it was trying to calibrate DTI restrictions so they would “have an impact on lending when housing market risks are elevated but have minimal impact in other periods”.  

“DTI restrictions are counter-cyclical in nature as borrowers tend to take on a higher level of debt relative to their incomes when house prices are increasing rapidly, and interest rates are low,” it said in its consultation paper.

It could also affect investors who are purchasing based on equity in their portfolios and might not necessarily be earning enough income to meet the ratio requirements.

The Reserve Bank said it was proposing a higher DTI ratio for investors because owner-occupiers tended to experience financial stress at lower DTIs than investors in environments when interest rates were rising.

“Investors tend to have more income available to service loans as they are receiving rental income as well as labour income and a smaller share of this extra income is needed to cover living expenses. Therefore, it is likely that DTI settings would not need to be as low for investors as compared to owner-occupiers to receive a similar financial stability benefit from the DTI restrictions.”

It said data indicated that first-home buyers tended to borrow at lower ratios, so they should be less affected than other borrowers. Only about 10% of first-home lending has a DTI of more than six. If you are considering applying for a first home and wondering how you would fit into the new rules, we can help.

The Reserve Bank’s consultation on DTIs ran until the middle of March and it is expected to release a final decision in June. It said it would then undertake a “brief” consultation period with banks, on the changes that would be required from them. It is proposing the rules will be activated in the “middle” of 2024.

Want to talk?

If you’re considering making a property move, or wondering how your current strategy would work with debt-to-income ratios, get in touch with us. We can help you understand what has been proposed, how it could affect you now, and into the future.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.