Making Sense of Debt-to-Income Restrictions and Loan-to-Value Ratio
Mortgage Express
Mortgage Resource
3 months ago
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From July 1, 2024, Debt-to-Income (DTI) restrictions will come into effect, setting limits on the amount of high-DTI lending banks can do. At the same time, Loan-to-Value Ratio (LVR) restrictions will loosen slightly, allowing banks to do more low-deposit lending. Find out what these changes mean for you as we make sense of Debt-to-Income (DTI) restrictions and Loan-to-Value Ratio (LVR).

The RBNZ’s rationale 

The Reserve Bank of New Zealand – Te Pūtea Matua recently announced that banks will need to comply with Debt-to-Income (DTI) restrictions from 1 July 2024.

DTI restrictions set limits on the amount of debt borrowers can take on relative to their income, with the aim of reducing the accumulation of high-risk lending in New Zealand’s banking sector. At the same time, Loan-to-Value Ratio (LVR) restrictions will ease slightly.

RBNZ Deputy Governor, Christian Hawkesby said DTIs and LVRs are “complementary”.

“LVRs target the impact of defaults by reducing the number 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.”

Debt-to-Income (DTI) restrictions explained

A DTI ratio looks at the amount of debt a borrower has, relative to their gross (before tax) income. Some banks already carry out DTI assessments when considering home loan applications, but the new rules will set out standard restrictions which banks need to follow.

The new DTI rules will limit banks to lending:

  • 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

Banks will also consider other lending rules and their own lending criteria and carry out their own affordability assessments.

There are some exemptions to the DTI rules, including:

  • Kāinga Ora loans.
  • Refinancing a mortgage, where the new loan value doesn’t exceed the original loan value.
  • Portability – this is where you ‘keep’ your home loan when selling, by changing the property securing the mortgage from the old property to the new one. This includes where you move the existing loan to a new bank. The exemption only applies if the value of your new loan doesn’t exceed the value of the original loan for your old property.
  • Bridging finance.
  • Property remediation (for example, leaky home).
  • Construction loans – this applies where you are constructing a new home, are purchasing a newly built home from the developer within 6 months of completion or are purchasing as part of the Government’s KiwiBuild programme.

*Excerpted from the RBNZ Explainer DTI

Loan-to-Value Ratio (LVR) explained

LVR restrictions provide a buffer should a housing downturn occurred, which would particularly affect highly indebted homeowners and investors.

Currently, the LVR settings limit banks’ lending to:

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

From 1 July 2024, LVRs will be eased to allow banks to lend:

  • 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%.

LVR restrictions only apply to new loans and will only affect existing borrowers if they want to take out a ‘top-up’ loan that takes their total LVR above the required threshold.

Understanding the changes

If you’re struggling to make sense of the changes to DTI’s and LVR’s, talk to an expert such as those at Mortgage Express. Working with a Mortgage Express branded adviser can help you understand your current financial situation and how DTI’s and LVR’s impact you, so you can make informed decisions about your financial future. Contact Mortgage Express today to connect with an adviser near you.