What Are Debt-to-income (DTI) Ratios?

In an attempt to further strengthen financial stability in New Zealand, the Reserve Bank of New Zealand (RBNZ) has introduced new debt-to-income (DTI) restrictions on banks’ mortgage lending.

But what are DTI ratios and how will they affect how much you can borrow to purchase a home? Canstar explores what you need to know about the new DTI ratios.

What is a debt-to-income ratio?

A DTI ratio ties the amount you can borrow to your income. If a lender restricts your borrowing to a DTI of two, it means you can borrow twice your income. So if you earn $70,000, you’ll be able to borrow $140,000 – it’s as simple as that!

What DTIs have the Reserve Bank set?

From July 2024, banks in New Zealand must adhere to the following restrictions for all new owner-occupier and investor lending:

• 20% of residential loans to owner-occupiers with a DTI greater than six
• 20% of residential loans to investors with a DTI greater than seven

The new DTIs sit alongside the existing loan-to-value ratios (LVRs), which limit lending to people with low deposits. As part of its lending-rules revisions, the RNBZ has also tweaked the LVRs.

What is a loan-to-value ratio?

An LVR refers to the size of a loan compared to the value of the property it’s used to purchase: what percentage of a property’s purchase price is covered by the loan.

For example, if the home you want to buy is worth $1 million, and you have a $300,000 deposit, then you’ll require a $700,000 loan to purchase the property. This means 30% is coming from you, and 70% from the bank: an LVR of 70%.

Generally, if you have the income to support your repayments, a bank is happy to lend up to 80% of a home’s value. Meaning you’ll need at least a 20% deposit, $200,000, for the million-dollar property mentioned above. A 20%-plus deposit will also, usually, secure you a more favourable interest rate on your mortgage.

What are the new LVRs?

Alongside introducing the DTI ratios, the RBNZ has also relaxed its current LVR restrictions on banks’ low-equity lending. It will now permit:

• 20% of owner-occupier lending to borrowers with an LVR greater than 80% (up from 15%)
• 5% of investor lending to borrowers with an LVR greater than 70% (up from 65%)

What’s the point of the new DTIs and LVRs?

The RBNZ wants the DTIs to work alongside its LVR regulations to ensure the housing market is less prone to booms and busts, which puts the nation’s economic stability at risk.

The LVR rules were introduced in 2013 in an attempt to cool the overheated property market. Over the years, they’ve been tweaked a few times. And they were removed entirely in response to the economic impact of the pandemic, before being reintroduced at the beginning of 2021.

However, despite the LVRs, over the past few years we’ve still witnessed an extreme rise and fall in house prices.

By implementing the DTIs, the RBNZ hopes it won’t have to tweak the LVRs quite so much. It wants the DTIs to sit in the background, preventing people overextending themselves, borrowing too much if mortgage rates drop, and pushing up house prices.

Will the DTIs affect getting a mortgage?

Due to the current high-interest environment and the stagnant housing market, the DTIs aren’t likely to have any immediate effect on bank lending.

If you look at the RBNZ’s bank lending stats, currently, banks are lending well under the proposed DTI ratio restrictions: less than 10% of new loans go to residential borrowers with a DTI ratio above 6, or investors with a DTI ratio above 7. This is because it’s not in the banks’ interest to give loans to people who can’t afford them.

Instead, first home buyers and those on lower incomes could benefit from the relaxed LVRs, as they allow more lending to those with smaller deposits.

The DTIs are only likely to kick in should we see another a rapid decline in mortgage rates, and subsequent rampant house price inflation, such as we experienced during the pandemic.

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.