Debt-to-Income Ratios: What They Mean To You

Posted 5 years ago by Admin

Thinking about getting a mortgage for that house you have your eye on? Well, the term debt-to-income ratios (DTIs) may be of interest to you!

Back in July this year, The Reserve Bank of New Zealand (RBNZ) deputy governor Grant Spencer discussed the hot property market here in New Zealand and what the RBNZ felt was needed to help cool down the market.

“Limits on Debt-to-Income ratios (DTIs) might also have a role to play but would be a new instrument that would have to be agreed by the Minister of Finance under the Memorandum of Understanding on Macro-prudential policy.  Further investigation of this option will be undertaken.” he said.

Just last month, the RBNZ then issued a formal request of approval for the implementation of DTIs, however, Finance Minister Bill English asked for more information to consider this.

Countries such as Australia, Canada, the US and the UK have DTIs where borrowers cannot borrow anymore than around 4.5 times their income - time will tell whether New Zealand follows suit!

What are debt-to-income ratios (DTIs)?
These are limits to curb borrowing power and help prevent borrowers from over committing themselves with debt. They are calculated in relation to the borrower's income. For example, a borrower with an income of around $56,000 per annum, will be able to borrow a maximum of around $252,000 to $280,000 if a ratio of 4.5 or 5 times an income is implemented.

What does it mean to you?
This will severely impact all home buyers borrowing capacity and limit purchasing power. This in turn could greatly affect house prices.  

Our verdict:

  • There are positives to having a curb on borrowing power - but, 5.5 to 6.5 times an income is probably more realistic (based on 20%+ deposit).

  • DTI ratios are possibly not a bad thing, but we are not sure they are the immediate answer. Further restrictions on investors may be more prudent.

  • Freeing up the banks to allow 15% of their loans to be high LVRs rather than 10% to give more chance to first home buyers would be a good option. High LVR borrowers are already limited to around 4 times their income when it comes to borrowing power.

  • It's possibly too late to try and add DTIs now as they may have too much of a negative effect for first home buyers and the overall market.

It will be a “wait and see” approach over the next six months as to whether these are going to be implemented or not. The Reserve Bank is indicating it won’t be using them, but still is seeking the power to use them if necessary. However, if you are looking to buy or invest in a property, talk with your Craig Pope mortgage advisor who will explain what your borrowing capability might be across a wide range of banks.


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