What are DTI’s and LVR’s and what impact will changes have on borrowers?

The Reserve Bank of New Zealand (RBNZ) announced last month that they have activated the Debt-to-Income (DTI) restrictions, and these will come into effect sooner than most banks anticipated. The new DTI rules will officially be enforced starting July 1st, 2024.

So what is a DTI?

DTI restrictions limit the amount of high-value lending banks can offer, and essentially it limits how much you can borrow compared to your income.  Your income includes everything you earn, e.g. your salary or self-employed income, additional income, and rental income. Your debts include all of your debts - eg student loans, mortgages, and personal debt such as personal loans or credit cards. 

Under the new rules:

• For general borrowers: 80% of borrowing is limited to 6 times the borrower’s income, with only 20% allowed to exceed this limit.
• For investors: 80% of borrowing is capped at 7 times the borrower’s income, with only 20% permitted to go beyond this threshold.

What does this mean for first home buyers?

There is no need to panic, and while this might sound bad for low-deposit borrowers, the truth is that the immediate impact will be minimal. Right now, the interest rates and the stress rates currently used by banks already exceed the DTI requirements. This means borrowers are likely to fail the servicing test (aka can you afford to pay your mortgage) before being affected by these DTI restrictions. The more significant impact is expected over the next 18-24 months, depending on how quickly interest rates decrease and house prices begin to rise. Essentially, these measures are designed to manage the next financial cycle rather than having any immediate impact on the market. 

What about LVR’s?

Another thing that is changing are loan-to-value ratios (LVR’S). This is a measure which is based on how much banks will lend against a property, compared to the value of the property. It restricts banks from being able to offer too much low deposit lending to borrowers. 

While the DTI’s might be being tightened, the LVR’s are actually being loosened. So what does this mean?

• • 80% LVR pre-approvals for owner-occupied properties will likely become the norm again, as banks can now allocate up to 20% of their lending in this category. This is great news for prospective homeowners!
  • 5% of lending can now be offered to property investors with less than 30% deposit or equity, down on 35%. 

If you haven't partnered with us yet, now is the perfect time. We understand the DTI and LVR rules like the back of our hand and can talk you through how any of these changes might affect your buying a property. If you are considering buying this year, then get in touch with us asap. 

Contact our Dunedin mortgage advisors at 03 471 8825 or click here to begin your journey with us online.