Money: BNZ tightens borrowing restrictions for low-income customers

BNZ is moving to restrict the amount of debt new borrowers can take on, implementing a debt-to-income ratio for some of its lending.

A debt-to-income ratio, or DTI, restricts the amount someone can borrow relative to the income that they earn - BNZ's DTI will be set at six, but it will be "constantly monitored and reviewed".

A DTI of six would mean that a person borrowing $800,000 would need to have income of $133,000.

It is similar to the loan-to-value ratios that banks must currently apply, which limit the amount of borrowing a person can do relative to the size of their deposit.

BNZ sent notice to brokers on Thursday morning saying it would be rolling out DTIs on lending that goes through brokers.

"BNZ is a responsible lender and we take our obligations and abide by regulations and requirements seriously," the email said.

The email raised concerns of borrowers struggling in an unsustainable housing market, particularly if interest rates continue to rise.

"Debt-to-Income (DTI) ratios are a measure of serviceability and when used appropriately, are a way of ensuring a sustainable housing market and ensuring borrowers are in a more secure position - particularly with rising interest rates," the email said.

But DTIs will likely make it even more difficult for some borrowers, particularly first home buyers, to get on the housing ladder if their incomes are not high enough.

National housing spokeswoman Nicola Willis said the news will be "a massive blow for potential first-home buyers who will find it near impossible to meet these lending criteria.

"Under Labour, first-home buyers have watched house prices race away from them at a faster and faster clip. Many will now give up hope of ever buying their first home," Willis said.

"The average house is now valued at more than eight times the average household income and tightening lending constraints will make it even harder for first-home buyers to ever get a foot in the door of the housing market."

BNZ is unlikely to be the only bank making these changes. Other banks already assess people's income when making loans, but do not have a formal standalone DTI policy.

BNZ had previously considered people's incomes when making loans, but it was part of an overall serviceability assessment, and not a standalone policy.

The Reserve Bank is currently looking at mandating DTIs across all banks, but this is likely to be politically controversial as it would restrict lending to first-home buyers.

The Bank and Finance Minister Grant Robertson have previously feuded over how and whether DTIs could or should affect first home buyers.

BNZ spokesman Sam Durban said that "with an increased regulatory focus on Debt-to-Income ratios as a way to deliver a more sustainable housing market, BNZ is making some changes to the way it assesses loans in our broker channel, looking at the overall level of debt our customers take on to ensure they are in a more secure position with rising interest rates".

Loan Market mortgage broker Bruce Patten said his firm had done some modelling on the changes to examine how much the changes would reduce people's borrowing potential.

"One guy it affected him by nearly [$]200,000 in borrowing, another it was only about [$]80,000," he said.

"It will have a bigger income on first-home buyers than anyone else," Patten said, although he said it was "not the end of the world - six is a big number".

Patten said the biggest challenge to people's borrowing potential would likely be Credit Contracts and Consumer Finance Act changes that come into force in December.

These changes will force lenders to take into account more expenses, like subscriptions and gym memberships, when assessing people's borrowing potential.

Speaking to the Herald, Antonia Watson, ANZ New Zealand chief executive, said the bank recorded people's debt-to-income ratios but did not use them as a hard lending cut-off point for individuals.

"We more use them to assess risk appetite. We don't want more than x per cent of our new lending at over y DTI. We are more using it in that sense rather than sorry your DTI is going to be seven so we are not going to give you a loan."

She said that would change if the Reserve Bank decided to bring in the policy tool.

But she said there were all sorts of ways it could be calculated.

"The type of income we collect for a home loan will often have a lot of haircuts to it so, for example, if you are relying on rental income we say you are not always going to have a tenant so we might haircut it 20 per cent.

"So what is income, what is your debt? Does it include your credit card? What happens if you have got a portfolio of properties? There is a lot of work to really make sure that we can comply with whatever the rules end up being because we need to understand the definitions as well."