Banks issued limits on high-debt mortgage lending

The Reserve Bank of New Zealand (RBNZ) has instructed banks to introduce debt-to-income (DTI) restrictions on their home loan lending, after notifying them last year that the change might be coming.

Under the new rules, which will take effect on 1 July, a maximum of:

• 20% of new lending to owner-occupiers can have a DTI ratio above 6.
• 20% of new lending to investors can have a DTI ratio above 7.

The DTI ratio is the borrower's debt relative to their pre-tax income. So if they borrow $600,000 and have an income of $100,000, their DTI is 6.

The DTI restrictions include an allowance for banks to do 20% of their lending outside the limits. The RBNZ believes this will improve efficiency by letting banks exercise their own discretion and manage complex cases.

LVR settings get loosened

Meanwhile, the RBNZ has decided to ease the existing loan-to-value ratio (LVR) restrictions. From 1 July:

• 20% of lending (up from 15% now) to owner-occupiers can have an LVR greater than 80%.
• 5% of lending to investors can have an LVR greater than 70% (up from 65% now).

Why these restrictions exist

DTI and LVR restrictions are macroprudential policy tools that aim to mitigate systemic risks and promote the stability of the financial system.

RBNZ Deputy Governor Christian Hawkesby said these two tools worked well together.

“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.”

As you’d expect, I keep a close eye on changes in the mortgage market. If any of your clients are looking for a mortgage adviser with their finger on the pulse, please refer them to me.