Reserve Bank reveals plans to shake up mortgage settings

Mortgage lenders will soon have to abide by debt-to-income (DTI) restrictions, although existing loan-to-value ratio (LVR) restrictions will be eased, under changes proposed by the Reserve Bank of New Zealand (RBNZ).

The RBNZ has proposed that no more than 20% of a bank's new home loans to owner-occupiers should have a DTI greater than 6, while no more than 20% of new loans to investors should have a DTI greater than 7.

At the same time, the RBNZ has proposed loosening LVR restrictions.

Under the new rules, 20% of a bank’s new owner-occupier loans (up from 15% now) could have LVRs above 80%, while 5% of new investor loans could have LVRs above 70% (up from 65% now).

These changes have not been finalised. The RBNZ is conducting a consultation process, which will end on March 12. After considering the feedback, the RBNZ will announce, sometime in the middle of the year, what the new DTI and LVR rules will be.

Why are DTI restrictions being introduced?

“In housing booms, the share of lending going to households with high DTI ratios often increases. At these times, financial stability risks build up, as these households are more likely to enter financial stress than households with lower DTI ratios if financial conditions change (such as increases in interest rates or other household costs),” according to the RBNZ.

“By restricting the share of high-DTI lending, we aim to limit the build-up of systemic financial risk, so that New Zealanders can be confident in the stability of their financial system. While limiting the build-up of systemic financial risk, we also aim to minimise the efficiency costs associated with doing so. These efficiency costs occur when otherwise creditworthy households are restricted in their borrowing.”

How will the changes affect first home buyers?

“Data indicates that first-home buyers tend to borrow at lower DTI ratios than other owner-occupiers or investors,” according to the RBNZ.

“Therefore, the DTI restrictions will likely have less impact on them than other borrowers. Additionally, because we will be able to set LVR restrictions a little more loosely when DTIs are in place, first-home buyers might have more access to the market, as saving a deposit is often the bigger barrier for them.”