Debt to Income Ratio NZ – What is it and how will it affect you?

Debt to Income Ratio NZ

It was revealed in June 2021 that the Reserve Bank of New Zealand (RBNZ), 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. 

This came after the Government pressured RBNZ to consider the impact of changes to their policies on the property market.

Fast forward to January 2024, RBNZ launched a consultation on activating debt to income (DTI) restrictions and loosening loan to value ratios (LVR) for residential lending.

What does this all mean? Here’s a bit of a breakdown into DTIs and why RBNZ may be looking to use this now.

What is Debt to Income Ratio NZ?

DTIs are a policy currently in use with ASB and a few other lenders. An example of how DTI may be used when assessing a mortgage application could be a DTI of 6. This means the debt-to-income ratio is 6:1, 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 Debt to Income Ratio NZ 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 typically wants to see $200+ uncommitted monthly income (UMI), after all expenses and proposed mortgage payments at their test interest rate. 

Back in 2021, the test rates the banks were using was between 5.5% to 6.5%. The actual residential lending rates at the time were between 2% to 3%. If the conditions were the same again, and a single customer has an income of $100,000, they could 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?

Up until now (January 2024), RBNZ have not had the need to utilise this new ‘tool’ in the ‘toolkit’, as lending conditions have only meant a DTI of 4-5 being possible under such high interest rates and bank test rates.

However, as it appears that inflation is coming back under control and likely we’ll see interest rates drop in the near future. RBNZ is likely looking to find a way to keep debt levels and the housing market under control if things start to get a bit ‘crazy’ and unsustainable like in 2021. To be able to pull a lever to keep lending levels stable if need be.

You can read more about the consultation here, if DTIs are introduced, it’s likely a good thing as such volatility, as we’ve seen over the last few years, can be damaging.

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.

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 stay informed.

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