Reserve Bank proposes introducing debt-to-income (DTI) mortgage restrictions

The Reserve Bank (RBNZ) is proposing to impose a new type of mortgage lending restriction on banks from the middle of the year.

It wants to limit the amount banks can lend to borrowers seeking a lot of debt compared to their incomes to protect the stability of the financial system.

The regulator is proposing to tell banks that no more than 20 per cent of the value of the mortgages they issue owner-occupiers can go to borrowers seeking debt worth more than six times their gross annual incomes.

As for investors, the proposal is for no more than 20 per cent of mortgages to this cohort to go to borrowers seeking debt worth more than seven times their incomes.

So, debt-to-income (DTI) restrictions would mean someone who earned $100,000 a year would struggle to get a mortgage worth more than $600,000 if they were an owner-occupier, or $700,000 if they were an investor.

The RBNZ also wants to ease loan-to-value ratio (LVR) restrictions.

It’s proposing to tell banks that no more than 5 per cent of their housing loans to investors can go to borrowers with deposits of less than 30 per cent. Currently, most investors need deposits of at least 35 per cent.

When it comes to owner-occupiers, the RBNZ is proposing to cap the value of loans to borrowers with deposits of less than 20 per cent at 20 per cent - up from the current 15 per cent cap.

RBNZ deputy governor Christian Hawkesby said it was important to have policies in place to manage boom-bust credit cycles.

He said DTI and LVR rules complemented each other.

“While the LVR tool is aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage, the DTI tool is aimed at reducing the probability of a systemic wave of households defaulting.

“We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies.

“Introducing DTI restrictions will also allow us to loosen LVR settings without increasing risks to financial stability.”

The RBNZ believed DTI restrictions would only really affect the housing market once it picked up.

For example, with interest rates as high as they are, borrowers might struggle to service debt worth a lot more than their incomes. Accordingly, banks aren’t lending much to borrowers with high DTI ratios.

However, when interest rates fall, borrowing larger sums of money will look more attractive.

The RBNZ said it wanted to activate DTI restrictions now, so that when the housing market next entered a boom phase, the rules would act as a “guardrail against the build-up of high-DTI lending”.

Members of the public have until March 12 to make submissions to the RBNZ on its proposals.

The RBNZ was empowered by the previous Labour-led Government to impose DTI restrictions.

Then-Finance Minister Grant Robertson agreed to add the tool to the RBNZ’s macroprudential toolkit following the housing market completely overheating during the peak of the Covid crisis.

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.