Reserve Bank says banks will have to comply with the new DTI rules from July 1, while loan to value ratio restriction easing will also be applied from the same date

By David Hargreaves, Interest.co.nz

The DTIs are here.

The Reserve Bank (RBNZ) has confirmed "activation" of the new debt-to-income (DTI) restrictions, along with the related loosening of loan to value ratio (LVR) limits.

The new DTI restrictions will create limits on the amount of high-DTI lending that banks can make (i.e. where the borrower has taken on a high amount of debt relative to their gross, or pre-tax, income). LVR restrictions limit the amount of low-deposit lending that they can make.

Banks will need to comply with the new DTI and LVR restrictions from July 1, 2024. The RBNZ says the restrictions will apply to new lending for residential properties in New Zealand, for both owner-occupiers and investors. Banks have previously been given 12 months to prepare their systems for the possible implementation of DTI restrictions.

Following a final round of public consultation earlier this year, the RBNZ had earlier indicated it would be ready to push the go button by "the middle of this year".

And so, now it is all go.

These are the new limits the banks will have to adhere to:

• 20% of new owner-occupier lending to borrowers with a DTI ratio over 6; and
• 20% of new investor lending to borrowers with a DTI ratio over 7.

LVRs will be eased to allow banks to make:

• 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and
• 5% of investor lending to borrowers with an LVR greater than 70%.

The current LVR settings are:

• 15% limit for loans with LVR above 80% for owner occupiers, and
• 5% limit for loans with LVR above 65% for investors.

These LVR limits will continue to apply until the new settings come into effect on July 1, 2024.

The low-key announcement from the RBNZ on Tuesday follows what's actually been a very lengthy and at times, agonising, process for the central bank, which has expressed interest in having a DTI measure since at least 2016 but has been subjected to a variety of delays. This has included push-back by both the previous National-led and then the Labour-led governments.

The RBNZ has previously said that the introductory DTI settings will be 'non-binding', given the current conditions in the mortgage market.

As previously reported, The latest quarterly figures released by the RBNZ, these for the March quarter, show at the moment the numbers of new mortgages being approved on high DTIs are well below the proposed limits.

That, of course, could and likely would change in the next housing market upturn - and it's not so long ago that the numbers of new mortgages on high DTIs was rocketing. So, that's when the DTI limits would really come into play.

As said above, the RBNZ has hankered for some years for a DTI measure to add to its 'macro-prudential toolkit' alongside such already well-used measures such as the loan to value ratio (LVR).

In a statement announcing introduction of the new limits, RBNZ Deputy Governor Christian Hawkesby said DTIs and LVRs are complementary.

"LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn, 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," he 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."

The RBNZ says all banks will have an initial six-month measurement window to calculate whether their lending is within the DTI restrictions, to ensure a smooth introduction of the DTI rules.

This story was originally published on Interest.co.nz and has been republished here with permission.