Proposed debt-to-income (DTI) restrictions: How will Reserve Bank’s new mortgage lending rules hit house hunters?

Easing of LVR rules expected to support prospective homebuyers more than new DTI rules will hamper them. Photo / Ted Baghurst

New bank lending rules, due to be imposed by the Reserve Bank (RBNZ) in the middle of the year, aren’t expected to make it harder for people to get mortgages - for now.

The banking regulator is proposing to introduce debt-to-income (DTI) restrictions, which would limit the amount banks could lend to owners-occupiers seeking debt worth more than six times their annual incomes and investors seeking debt worth more than seven times their annual incomes.

The RBNZ also wants to ease existing loan-to-value ratio (LVR) restrictions a little to make it easier for borrowers with small deposits to get mortgages.

CoreLogic NZ chief property economist Kelvin Davidson believes that overall, the proposed changes will make it a little easier for people to get mortgages.

Looking at DTI restrictions first, Davidson shared the RBNZ’s view that they would only really affect the property market once interest rates fell and demand for credit rose.

With mortgage rates hovering around the 7 per cent mark, prospective borrowers need to be able to prove to their banks they can service debt at around 9 per cent.

In other words, someone wanting a $600k mortgage (repayable over 30 years) would need to be able to make repayments of $1100 a week.

If the RBNZ followed through with its proposal to set DTI restrictions at 6:1 for owner-occupiers, that person would also need to earn more than $100k a year.

Let’s say they only just fell short, earning $90k. It wouldn’t really matter, as they would struggle to convince the bank they could afford repayments of $1100 a week.

The high interest rate would be the prospective borrower’s biggest problem, not the DTI restriction.

Now, let’s assume mortgage rates fell to 4 per cent, so the bank tested the person wanting a mortgage of $600k at 6.5 per cent.

The prospective borrower would have to assure the bank they could afford weekly repayments of $875.

While this would still be tough on a $90k salary, the person would be better placed than when interest rates were higher.

At this point, the DTI restriction could become the real impediment for the prospective borrower.

Accordingly, Davidson said imposing DTI restrictions this year - while interest rates are high - is really about the next economic cycle.

It’s about preventing people from borrowing too much when interest rates eventually fall, and then getting in trouble when they rise again.

The RBNZ noted it wouldn’t tweak DTI setting as frequently as it changes LVR settings, as the limits would naturally become more restrictive in low interest rate environments.

Loan Market mortgage broker Bruce Patten worried DTI restrictions would ultimately be too heavy-handed.

“It’s a very blunt instrument that’ll affect middle-class people,” Patten said, fearing the rules would prevent people who could afford to take out debt from accessing it.

The RBNZ wants to allow up to 20 per cent of banks’ mortgage lending to go to borrowers who don’t meet its DTI rules. It also wants certain loans, including for new builds, to be exempt from the rules.

Its LVR rules include similar exemptions and “speed limits”.

Nonetheless, Patten still thought the restrictions were too “big brotherish”.

He argued banks were well placed to assess how much debt people could take on, and the RBNZ’s “meddling” would only throw the market off kilter.

The public has until March 12 to make submissions to the RBNZ on its DTI and LVR proposals.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.