You may have come across the term ‘debt-to-income ratio’ (DTI) in property market news for recent times. As of 1 July 2024, registered banks in New Zealand will need to comply with DTI restrictions set by the Reserve Bank. So, what is it and why does it matter? Let’s delve in.
What is debt-to-income ratio?
DTI is a key metric used by lenders to assess your ability to manage debt payments. It is calculated by looking at the amount of debt you have relative to your gross income.
When considering home loan applications, some banks have already been applying DTI assessments. The new rules, effective from 1 July 2024, will standardise this practice across all banks. DTI rules only apply to bank lending and not lending from non-bank providers.
According to the Reserve Bank, the new DTI rules will allow banks to lend:
- 20% of owner-occupier lending to borrowers with a DTI ratio greater than 6.
- 20% of investor loans to investors with a DTI ratio greater than 7.
For more details, see the Reserve Bank’s explanation here.
Why are DTI rules needed?
The Reserve Bank is responsible for maintaining New Zealand’s financial stability. To achieve this, they use ‘macroprudential tools’ to prevent banks from taking on excessive risk.
One of these tools is the DTI restriction. Its purpose is to limit risky lending by banks during economic highs, thereby reducing the chance of widespread defaults when the economy slows down.
DTI restrictions work alongside other macroprudential tools, like loan-to-value (LVR) restrictions, by addressing different types of financial risks.
What do they mean for home buyers?
According to OneRoof, the new DTI rules mean buyers may not be able to borrow as much as they previously could. In most cases, buyers will be unable to borrow over six times their income before tax.
It’s important to note that the DTI thresholds may change over time for financial stability reasons.
How to improve your DTI ratio?
- Reduce debt: Focus on paying off existing debts.
- Increase income: Look for opportunities to increase your earnings.
- Create a budget: Plan your finances carefully.
- Seek professional advice: Get in touch with a mortgage adviser.
As mortgage advisers, we can help you understand your current financial situation and how DTIs may impact you. If you need personalised advice or have any questions – get in touch.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.