{"id":12854,"date":"2024-03-28T12:06:17","date_gmt":"2024-03-27T23:06:17","guid":{"rendered":"https:\/\/thecoopergroup.co.nz\/?p=12854"},"modified":"2024-03-28T12:16:05","modified_gmt":"2024-03-27T23:16:05","slug":"everything-you-need-to-know-about-debt-to-income-ratios","status":"publish","type":"post","link":"https:\/\/thecoopergroup.co.nz\/news\/everything-you-need-to-know-about-debt-to-income-ratios\/","title":{"rendered":"Everything you need to know about debt to income ratios"},"content":{"rendered":"\n<p>DTIs could be coming soon &#8211; what are they and how will they affect homebuyers and the property market?<\/p>\n\n\n\n<p>It\u2019s happening &#8211; The Reserve Bank is going to introduce debt to income (DTI) ratios soon. There\u2019s no official date yet but the bank\u2019s most recent policy consultation paper in January 2024 pointed to mid 2024.<\/p>\n\n\n\n<p>This new policy could have a big effect on the\u00a0<a href=\"https:\/\/www.trademe.co.nz\/c\/property\/property-news\" target=\"_blank\" rel=\"noopener\">New Zealand property market<\/a>, home buyers and investors in the long term.\u00a0<em>Let\u2019s take a closer look.\u00a0<\/em><\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-medium-font-size\"><strong>What are debt to income ratios?<\/strong><\/p>\n\n\n\n<p>Debt to income ratios or DTIs limit the&nbsp;<a href=\"https:\/\/www.trademe.co.nz\/c\/property\/article\/how-much-can-i-borrow-for-a-mortgage\" target=\"_blank\" rel=\"noopener\">amount you can borrow<\/a>&nbsp;by tying your maximum borrowing to your income. For example, with a DTI of six you can borrow six times your income:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>Annual income x DTI = Maximum borrowing limit<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>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:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Annual income (NZ household gross average)<\/strong><\/td><td><strong>Debt to income ratio owner occupier<\/strong><\/td><td><strong>Maximum borrowing limit<\/strong><\/td><\/tr><tr><td>$117,126<\/td><td>6<\/td><td>$702,756<\/td><\/tr><tr><td>$117,126<\/td><td>7<\/td><td>$819,882<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div style=\"height:43px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-medium-font-size\"><strong>These could be NZ\u2019s DTI levels from mid-2024<\/strong><\/p>\n\n\n\n<p>The following DTI levels were proposed but not confirmed in the Reserve Bank\u2019s January 2024 policy paper:<\/p>\n\n\n\n<ul>\n<li><strong>Investors<\/strong>: banks may lend no more than 20% of their total investor lending to investors with a DTI of 7 or greater.<\/li>\n\n\n\n<li><strong>Owner occupiers<\/strong>: banks may lend no more than 20% of their total owner occupiers lending to owner occupiers with a DTI of 6 or greater.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>Importantly, the 20% \u2018speed limits\u2019 mean that it\u2019s still possible to borrow outside of these limits &#8211; 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).&nbsp;<\/p>\n\n\n\n<p>When DTIs are introduced, you\u2019ll still have to meet\u00a0<a href=\"https:\/\/www.trademe.co.nz\/c\/property\/product\/Mortgages-in-New-Zealand\" target=\"_blank\" rel=\"noopener\">bank lending and serviceability criteria<\/a>\u00a0and the usual home loan application process won\u2019t change.\u00a0<\/p>\n\n\n\n<div style=\"height:43px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-medium-font-size\"><strong>What are NZ\u2019s debt to income ratios meant to achieve?<\/strong><\/p>\n\n\n\n<p>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\u2019s financial system).&nbsp;&nbsp;<\/p>\n\n\n\n<p><strong>Borrowers will be prevented from taking on large loans<\/strong>&nbsp;relative to their income during housing booms, which will help keep house price increases at more reasonable levels.&nbsp;<\/p>\n\n\n\n<p><strong>This will also, in theory, reduce the prevalence of mortgage default and mortgagee sales<\/strong>\u00a0during periods when interest rates are high and house prices are decreasing (because fewer borrowers took on large loans during the boom).\u00a0<\/p>\n\n\n\n<div style=\"height:43px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-medium-font-size\"><strong>How will debt to income ratios affect the NZ housing market?<\/strong><\/p>\n\n\n\n<p>According to the experts, debt to income ratios won\u2019t 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\u2019s data suggests that banks are lending at levels under the DTI ratios right now (late 2023):<\/p>\n\n\n\n<ul>\n<li><strong>Owner occupier lending:&nbsp;<\/strong>around 9-10% at DTI of 6 or more.&nbsp;<\/li>\n\n\n\n<li><strong>Investor lending:&nbsp;<\/strong>around 7-8% at DTI of 6 or more.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>However, the DTIs may reduce the extremes of the&nbsp;<a href=\"https:\/\/www.trademe.co.nz\/c\/property\/article\/nz-property-market-trends-and-forecasts-for-2024\" target=\"_blank\" rel=\"noopener\">next property market boom<\/a>&nbsp;by limiting high DTI lending (In other words, if borrowers can\u2019t take out big loans they can\u2019t make crazy offers for houses and push up prices).&nbsp;<\/p>\n\n\n\n<p>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.&nbsp;<\/p>\n\n\n\n<p><em>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.\u00a0<\/em><\/p>\n\n\n\n<div style=\"height:41px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-medium-font-size\"><strong>Get advice on DTIs early<\/strong><\/p>\n\n\n\n<p>If you\u2019re considering buying a home or refinancing after mid June it\u2019s a good idea to&nbsp;<a href=\"https:\/\/www.trademe.co.nz\/c\/property\/article\/working-with-a-mortgage-broker-in-new-zealand\" target=\"_blank\" rel=\"noopener\">speak to a mortgage broker<\/a>&nbsp;for advice around debt to income ratios, especially if you\u2019re 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.&nbsp;<\/p>\n\n\n\n<p><em>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\u00a0<\/em>seek professional advice.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"has-medium-font-size\"><strong>Author<\/strong><\/p>\n\n\n\n<p><strong>Ben Tutty<\/strong><\/p>\n\n\n\n<p>Ben Tutty is a regular contributor for Trade Me and he&#8217;s also contributed to Stuff and the Informed Investor. He&#8217;s got 10+ years experience as both a journalist and website copywriter, specialising in real estate, finance and tourism. Ben lives in W\u0101naka with his partner and his best mate (Finnegan the whippet).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>DTIs could be coming soon &#8211; what are they and how will they affect homebuyers and the property market? It\u2019s happening &#8211; The Reserve Bank is going to introduce debt to income (DTI) ratios soon. There\u2019s no official date yet but the bank\u2019s most recent policy consultation paper in January 2024 pointed to mid 2024. This new policy could have a big effect on &#8230;<\/p>\n","protected":false},"author":10,"featured_media":12861,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/posts\/12854"}],"collection":[{"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/comments?post=12854"}],"version-history":[{"count":0,"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/posts\/12854\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/media\/12861"}],"wp:attachment":[{"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/media?parent=12854"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/categories?post=12854"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thecoopergroup.co.nz\/wp-json\/wp\/v2\/tags?post=12854"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}