Squirrel: What Do the new DTI Limits Mean for Borrowers?

Almost nine years after the Reserve Bank of New Zealand (RBNZ) first tossed around the idea of implementing DTI (or debt-to income) lending restrictions in New Zealand, DTIs are finally happening.

The new DTI rules will limit how much you can borrow to buy residential property in New Zealand, based on a multiple of your household income. That multiple depends on why you’re buying the property and is set at six for owner-occupiers and seven for property investors.

As you’d expect with any new banking regulation, the move will have significant implications for different parts of the housing market. And some borrowers are going to be harder hit than others.

So, what do the new DTI limits mean for you?

What are the DTI limits and why are they being put in place?

DTIs are another weapon in the RBNZ’s arsenal, designed to keep our housing market on a more even keel and ensure our financial system stays stable. They join a host of other bank lending rules, such as the LVRs, that all exist for this same purpose.

The DTIs are designed to:

• Prevent borrowers from getting up to their eyeballs in debt on loans they can’t afford and to reduce the likelihood of borrowers going into financial distress should interest rates rise.
• Stop house prices from running away on us during housing booms (like they did during the pandemic) by limiting people’s ability to rapidly increase their borrowing power by coming up with a bigger deposit. The idea is that they’ll come into play at times when the market is running hot and be less restrictive at times when the market is operating as expected.

→ Related article: What is a Loan-to-value Ratio (LVR)?

How will the DTIs impact owner-occupiers?

The good news is that the introduction of DTIs doesn’t change much for owner-occupiers.

In the current environment, bank servicing requirements are so strict (with test rates sitting at or near 9%) that these will continue to be the most significant barrier to getting a mortgage application across the line.

Even looking ahead to when interest rates start to fall, a DTI setting of six shouldn’t cause too many problems. Outside of recent housing booms, most mortgage lending to owner-occupiers in the last few years has fallen comfortably under the six-times-income limit, especially when you factor in the 20% buffer for banks to lend over and above this level.

We’ll probably see lenders get a bit stricter about requiring supporting paperwork to confirm sources of income but, otherwise, the transition should be smooth, clean and simple.

How will the DTIs impact property investors?

The DTIs are a different story for property investors, unfortunately. Although their impact will be minimal in the short term, as high interest rates continue to make it challenging to borrow, going forwards, a cap of seven-times-income doesn’t give you a lot of room to work with.

Over the past few years, a significant proportion of lending to property investors has been at a DTI of over seven. Enough that even with a 20% buffer, the new rules will restrict your borrowing ability through most parts of the housing market cycle, even when things aren’t running hot.

The borrowers who’ll feel the impact will be traditional, larger-scale property investors, those with decent portfolios, who are reliant on rent as their primary source of income. It’s going to be tough for them to meet the DTI framework.

How will the DTIs impact business owners?

The new DTI rules will also present a few challenges for business owners.

The big thing to be aware of is that it’s about to get much more challenging to borrow against a property to access additional working capital for your business. Especially when earnings are low (a time when you might need the cash injection most), because that’s when you’re most likely to be outside the DTI limit.

In the past, using your house(s) has been a popular (and relatively easy) option for tapping into business funding – so it’s definitely something to keep in mind. The sands are shifting.

Moving forward, this will mean that business owners will increasingly be pushed towards loan products specifically designed for business purposes.

It also makes it more important than ever to plan ahead and make sure you have adequate facilities in place to cover you in the event things go wrong, so you won’t have to go begging to your lender on the back foot.

The rule of thumb in this new environment is to always make sure you have money available to you before you need it.

Who else needs to be wary of the new DTI rules?

Anyone traditionally on the edge of bank lending criteria could find that the new DTI rules create some challenges.

That includes borrowers heavily reliant on overseas sources of income, or those who are self-employed – especially those in the trades, developers, start-up entrepreneurs, and those in other industries where verifiable income is a little more fluid.

With the DTI limits imposing a hard line in the sand regarding income requirements for bank lending, these borrowers are likely to find themselves increasingly pushed into the non-bank space when it comes to finding lending solutions that work for them.

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