Kiwis considering buying a home or investing in property in New Zealand will be closely monitoring the Reserve Bank of New Zealand’s (RBNZ) proposal to introduce debt-to-income (DTI) restrictions. If introduced, DTIs would limit the amount of debt households can take on and cap mortgage lending against a borrower’s income. With the high cost of New Zealand housing, DTIs could effectively slow down the property market and make it harder for average earners to secure a mortgage.
Understanding Debt-to-Income (DTI) Ratio
What is DTI?
Debt-to-income is a measure used by lenders to assess a borrower's ability to manage their debt repayments relative to their income. It compares the amount of debt households can have (such as mortgage payments, credit card debt, and loans) compared to gross income.
What is being proposed?
The RBNZ aims to mitigate the risks associated with high levels of household debt and promote responsible lending practices amongst banks. By implementing DTI restrictions, the RBNZ will prevent borrowers from taking on more debt than they can afford, reducing the likelihood of financial instability.
Here are the DTI rules the RBNZ is proposing:
- For owner-occupiers, DTI would be 6 x gross income
- For property investors, DTI would be 7 x gross income
Here’s an example of how DTI would be calculated for a couple with a combined annual income of $150,000:
As owner-occupiers with a DTI limit of 6 times annual income, the maximum amount they could borrow would be:
$150,000 (combined annual income) * 6 = $900,000
Under the proposed DTI limit, these home buyers could borrow up to $900,000 to purchase a property.
If the couple had any existing debt, the maximum amount they could borrow based on their debt-to-income (DTI) ratio would need to be adjusted to factor in their existing debt repayments.
Implications for Kiwi Home Buyers
While the RBNZ has proposed the introduction of DTI restrictions, when these will be implemented remains uncertain. However, as home buyers and property investors in New Zealand, it's essential to stay informed about any updates or announcements from the Reserve Bank and the possible implications that the introduction of DTIs would have on purchasing power and affordability.
Impact on affordability
DTI restrictions could potentially limit the amount of money home buyers could borrow for a mortgage, which would affect their purchasing power. That could mean home buyers have to adjust their expectations about the size or location of a preferred property in order to buy within their borrowing limits.
Challenges for first home buyers
With the high cost of living and housing prices in New Zealand, many first home buyers already face significant barriers to entering the property market. DTI restrictions could further exacerbate these challenges, making it even more difficult for some aspiring homeowners to achieve their goal of home ownership.
Adapting Your Financial Strategy
Given the potential impact of DTI restrictions on mortgage lending, it's essential for home buyers to reassess their financial situation and adjust their strategy accordingly.
- Take the time to assess your income and expenses and the impact that any existing debt could have on your borrowing power.
- Stay informed of any developments related to DTI restrictions and other regulatory changes in the housing market.
- Consult with a qualified mortgage adviser who can provide personalised guidance tailored to your specific circumstances.
For expert advice on navigating the RBNZ's proposed DTI restrictions and securing the right mortgage for your needs, contact a Mortgage Express branded mortgage adviser. Our team of experienced professionals can provide you with up-to-date insights and tailored solutions to help you achieve your home ownership goals in today's evolving market.
