RBNZ introduces mortgage debt-to-income speed limits

Mortgage lenders will have to restrict the amount of high-debt lending they do, under new rules designed to reduce risk in the banking system.

From 1 July, no more than 20% of a bank's new lending to owner-occupiers can have a debt-to-income (DTI) ratio above 6. (If a borrower had an annual income of $50,000 and took out a $300,000 loan, their DTI would be 6.) Also, no more than 20% of new lending to investors can have a DTI ratio above 7.

The DTI restrictions include an allowance for banks to do 20% of their lending outside these limits, so banks can exercise their own discretion and manage complex cases.

The Reserve Bank of New Zealand (RBNZ) signalled last year that these DTI restrictions might be implemented, with banks given 12 months to prepare their systems.

LVR restrictions being changed

While DTI restrictions are being introduced, the current loan-to-value ratio (LVR) restrictions are being eased.

Under the new rules, which take effect on 1 July, a maximum of 20% of owner-occupied lending (up from 15% now) can have an LVR greater than 80%, while a maximum of 5% of investment lending can have an LVR greater than 70% (up from 65% now). 

RBNZ Deputy Governor Christian Hawkesby said the DTI and LVR policies were complementary.

“LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing downturn, while DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt. Both act as guardrails reducing the build-up of high-risk lending in the system,” she said.

“Having both the DTI and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system. Therefore, activating DTIs means that we can ease LVR settings too.”

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