The speculation about whether or not the Reserve Bank will eventually impose formal caps on debt-to-income (DTI) ratios for new mortgage lending has ebbed and flowed for quite some time. Indeed, it’s already been about 18 months since the Minister of Finance accepted the RBNZ adding DTIs into their toolkit (June 2021), having previously asked for analysis from the RBNZ around potential impacts as early as February last year. The fact that the RBNZ already has the ability to use DTIs may make this issue less susceptible to the political cycle.
In the past few weeks, however, we’ve had updated guidance from the RBNZ, which didn’t perhaps tell us much new about the actual structure of DTIs, but did give a fairly clear indication that they intend to impose DTIs, and the timing – from early 2024.
So what are the key points to be aware of? In a nutshell, DTIs effectively put a ‘hard stop’ on how much debt someone can obtain at any time. After all, it’s difficult to increase your income overnight, so DTIs limit short-run borrowing capacity and hence how many properties somebody can own. This is quite different from the loan-to-value ratio rules, which allow continued purchases, provided that the current properties within a portfolio are rising in value and providing new equity for the borrower.
In many ways, investors stand to be the hardest hit by any DTI rules. Indeed, imagine you have a $100,000 income, an existing mortgage on your own home of $400,000, and operated in a world where the DTI was capped at seven. This means you could have total debt of $700,000, or only $300,000 more than at present. That figure doesn’t go far, even after recent price falls.
On the plus side, the RBNZ...
