Banks introduce new mortgage lending restrictions

In June this year, the Reserve Bank received approval for a new tool to rein in house prices and control debt levels: debt-to-income (DTI) ratios.

Now, some of the banks have decided to move first. BNZ has introduced a DTI for all its borrowers, and ASB has confirmed that it, too, is now applying DTI restrictions.

How does it work?

Debt-to-income ratio limits set out a maximum loan amount based on your income level. BNZ has applied a DTI limit of six, meaning that you can borrow a total of six times your income.

For example, if you earn $100,000 a year, your total home loan would be limited to $600,000. Say you were putting down a 20% deposit, that would mean you could purchase a home worth a maximum of $750,000. (With a 10% deposit, the maximum house price would be around $667,000.)

What will this mean for home buyers?

This will make it more difficult for buyers to stretch themselves into a large mortgage, which has recently been one an important factor for those trying to get into New Zealand’s expensive property markets. RBNZ data show 25% of first-home buyers are borrowing at DTIs over six, rising to 37% in Auckland.

However, the shift toward using DTIs is also likely to be another dampening factor for house prices, particularly when combined with rising interest rates. It may help to lower prices or slow growth, which could mean house prices aren’t racing out of reach as first-home buyers try to save.

What about property investors?

Property investors are subject to the same DTI restrictions. Banks will add rental income to your personal income, but in most cases a ‘haircut’ is applied, usually at 25%. This means if your rental property earns $30,000 a year in rent, the bank would subtract $7500 as a buffer for rates, insurance and other costs. In total, your rental would add $22,500 to your income, then the bank would multiply the total by six to find a loan limit.

This may limit your borrowing significantly. It could also be important when you go to either borrow more, or refinance a loan with your bank. It’s possible they will want to bring your total lending into line with their DTI restrictions.

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