Everything you need to know about debt to income ratios

DTIs could be coming soon – what are they and how will they affect homebuyers and the property market?

It’s happening – The Reserve Bank is going to introduce debt to income (DTI) ratios soon. There’s no official date yet but the bank’s most recent policy consultation paper in January 2024 pointed to mid 2024.

This new policy could have a big effect on the New Zealand property market, home buyers and investors in the long term. Let’s take a closer look. 

What are debt to income ratios?

Debt to income ratios or DTIs limit the amount you can borrow by tying your maximum borrowing to your income. For example, with a DTI of six you can borrow six times your income:

Annual income x DTI = Maximum borrowing limit

If your household is earning the average gross household income as per Stats NZ (June 2023) then this is what your borrowing limit would look like, for example:

Annual income (NZ household gross average)Debt to income ratio owner occupierMaximum borrowing limit

These could be NZ’s DTI levels from mid-2024

The following DTI levels were proposed but not confirmed in the Reserve Bank’s January 2024 policy paper:

  • Investors: banks may lend no more than 20% of their total investor lending to investors with a DTI of 7 or greater.
  • Owner occupiers: banks may lend no more than 20% of their total owner occupiers lending to owner occupiers with a DTI of 6 or greater. 

Importantly, the 20% ‘speed limits’ mean that it’s still possible to borrow outside of these limits – banks can choose to lend to borrowers with higher DTIs on a case-by-case basis (as long as their total lending is below the 20% limit). 

When DTIs are introduced, you’ll still have to meet bank lending and serviceability criteria and the usual home loan application process won’t change. 

What are NZ’s debt to income ratios meant to achieve?

The Reserve Bank is planning to introduce DTIs to reduce the risky lending that happens when the housing market is hot (like it was from 2020 to late 2021). The idea is that by constraining this lending, DTIs will reduce the boom and bust nature of the housing market and lending (and the resulting risks to NZ’s financial system).  

Borrowers will be prevented from taking on large loans relative to their income during housing booms, which will help keep house price increases at more reasonable levels. 

This will also, in theory, reduce the prevalence of mortgage default and mortgagee sales during periods when interest rates are high and house prices are decreasing (because fewer borrowers took on large loans during the boom). 

How will debt to income ratios affect the NZ housing market?

According to the experts, debt to income ratios won’t affect the housing market much at all during the next few years because the market is quiet and house prices have fallen slightly. In fact, the Reserve Bank’s data suggests that banks are lending at levels under the DTI ratios right now (late 2023):

  • Owner occupier lending: around 9-10% at DTI of 6 or more. 
  • Investor lending: around 7-8% at DTI of 6 or more. 

However, the DTIs may reduce the extremes of the next property market boom by limiting high DTI lending (In other words, if borrowers can’t take out big loans they can’t make crazy offers for houses and push up prices). 

To use a past property boom as an example, DTIs would have had a considerable effect in late 2021 when the property market was booming and higher DTI borrowing was at its peak. At this time, around 32% of bank lending to owner occupiers had a DTI of 6 or higher, and around 43% of investors had a DTI of 7 or higher. 

If past trends are anything to go by, DTIs will affect investors more than owner occupiers as they tend to borrow more relative to their income. 

Get advice on DTIs early

If you’re considering buying a home or refinancing after mid June it’s a good idea to speak to a mortgage broker for advice around debt to income ratios, especially if you’re an investor. A good broker should have relationships with several lenders, and may know which banks are currently below their 20% DTI speed limit, and willing to take on new high DTI lending. 

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand home loan sector. Nothing in this article constitutes a recommendation that any type of loan is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making decisions about a home loan, we highly recommend you seek professional advice.


Ben Tutty

Ben Tutty is a regular contributor for Trade Me and he’s also contributed to Stuff and the Informed Investor. He’s got 10+ years experience as both a journalist and website copywriter, specialising in real estate, finance and tourism. Ben lives in Wānaka with his partner and his best mate (Finnegan the whippet).

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