It was revealed last week that the Reserve Bank of New Zealand (RBNZ) has, after pushing for it, successfully added Debt-to-Income (DTI) ratios to their toolkit, which could be utilised in an effort to control the property market in the future. However, a lengthy consultation will still be needed if they want to use this tool.
This comes after the Government pressured RBNZ to consider the impact of changes to their policies on the property market.
What is DTI?
DTIs are a policy currently in use with ASB and its sister company Sovereign, introduced last year. Their policy with mortgage applications includes a DTI of 6. This means the debt-to-income ratio is 6:1 (however, we’ve been seeing a relaxing of this policy with ASB and Sovereign), meaning the mortgage can only be 6 x the income of the applicant or applicants, for example:
Joe Blogg’s salary = $100,000 x 6 = $600,000
The maximum borrowing power for Joe is $600,000, if he has a deposit of $200,000, he can purchase a property with a value up to $800,000.
The same applies if there are two applicants, combined income x 6 = maximum borrowing ability.
How will DTIs impact us?
Your purchase power:
Usually the bank is using a UMI system when assessing how much applicants can borrow (the system tests based on net income minus expenses and proposed new lending). The bank wants to see $200+ uncommitted monthly income (UMI), after all expenses and proposed mortgage payments at their test interest rate. If a single customer has an income of $100,000, they should be able to borrow up to $800,000 if they include a couple of boarders. If they have a 20% deposit, then they will be in a position to buy a $1,000,000 property but if a DTI of 6 is used (like the example above), then they could only purchase a property up to $800,000. That’s a $200,000 difference in lending.
Bank competitiveness:
The main banks in New Zealand, eg. ANZ, ASB, Westpac, BNZ etc. are all under the restrictions imposed by RBNZ, and have to adhere to rules like the existing Loan-to-Value ratios (LVRS) (CLICK HERE to learn more about LVRS). However, they remain competitive with each other through their differences in their own policies.
Introducing DTIs will dramatically impact their competitiveness in the market, which will likely push potential customers (or possibly existing) into near-bank or non-bank lenders, who aren’t so influenced by RBNZ and won’t necessarily impose DTIs.
Near and non-bank lenders have typically higher interest rates, but these are less likely to deter buyers as the borrowing power (and purchase power) is so much greater.
Will RBNZ use this tool?
There’s no indication yet, that RBNZ have intent to use this tool. It has simply been added to their toolkit of things they can use to help shift the economy in a direction that aligns with their priorities, which is first and foremost, keeping inflation between 1-3%.
There’s nothing to worry about with changes like this. Policies change regularly, there’s no need to stress about things you can’t control. An experienced and savvy mortgage advisor knows how to adapt to ever changing policy updates. Utilising one is your best asset to secure your property, get in touch with us if you want to know more about your borrowing power.
My advice is to stay focused on what you are doing and adapt as you go. Auckland property is still in my opinion, the smartest and safest investment, when you know what to buy.
Want to make sure you get on the right ladder? Check out my article on why you should forget the first home buyers grant: CLICK HERE
Here is a recording from the Facebook Livestream update on this topic:
Lucia Xiao | support@luciaxiao.co.nz