What Are Debt-to-income (DTI) Ratios?

In an attempt to further strengthen financial stability in New Zealand, and reduce the risk of households defaulting on their mortgages en masse, the Reserve Bank of New Zealand (RBNZ) is planning to introduce new debt-to-income (DTI) restrictions on banks’ mortgage lending.

But what are DTI ratios and how will they affect how much you can borrow to purchase a home? Canstar explores what you need to know about the proposed new DTI ratios.

What is a debt-to-income (DTI) ratio?

A DTI ratio ties the amount you can borrow to your income. If a lender restricts your borrowing to a DTI of two, it means you can borrow twice your income. So if you earn $70,000, you’ll be able to borrow $140,000 – it’s as simple as that!

What DTIs are the Reserve Bank proposing?

The Reserve Bank is currently asking for feedback on its plans to restrict banks’ mortgage lending to:

• 20% of residential loans to owner-occupiers with a DTI greater than 6
• 20% of residential loans to investors with a DTI greater than 7

The new DTI ratios would work alongside the existing loan-to-value ratios (LVRs), which limit lending to people with low deposits.

What is a loan-to-value ratio?

An LVR refers to the size of a loan compared to the value of the property it’s used to purchase – what percentage of a property’s purchase price is met by the loan.

For example, if the home you want to buy is worth $1 million, and you have a $300,000 deposit, then you’d require a $700,000 loan to purchase the property. This would mean 30% is coming from you, and 70% from the bank: an LVR of 70%.

Generally, if you have the income to support your repayments, a bank is happy to lend up to 80% of a home’s value. Meaning you’ll need at least a 20% deposit, $200,000, for the million-dollar property mentioned above. A 20%-plus deposit will also, usually, secure you a more favourable interest rate on your mortgage.

What new LVRs are the Reserve Bank proposing?

Alongside introducing DTI ratios, the RBNZ is also proposing to loosen its current LVR restrictions on banks’ low-equity lending. It will permit:

• 20% of owner-occupier lending to borrowers with an LVR greater than 80% (up from 15%)
• 5% of investor lending to borrowers with an LVR greater than 70% (up from 65%)

What’s the point of the DTIs?

The RBNZ wants the DTIs to work alongside its LVR regulations to ensure the housing market is less prone to booms and busts, which puts the nation’s economic stability at risk.

The LVR rules were introduced in 2013 in an attempt to cool the overheated property market. Over the years, they’ve been tweaked a few times. And they were removed entirely in response to the economic impact of the pandemic, before being reintroduced at the beginning of 2021.

However, despite the LVRs, over the past few years we’ve still witnessed an extreme rise and fall in house prices.

By implementing the DTIs, the RBNZ hopes it won’t have to tweak the LVRs quite so much. It wants the DTIs to sit in the background, preventing people overextending themselves, borrowing too much if mortgage rates drop, and pushing up house prices.

As it outlines in its Consultation Paper, the RBNZ states that the objectives of its DTI restrictions are to improve financial stability by:

• Reducing the probability of a systemic wave of mortgage defaults
• Reducing housing market cyclicality

How will DTIs affect getting a mortgage to buy a house?

Currently, the RBNZ is only asking for feedback on its plans to implement the DTIs. But when they are introduced, it’s unlikely they will have a immediate effect on bank lending.

If you look at the RBNZ’s bank lending stats, currently, banks are lending well under the proposed DTI ratio restrictions: less than 10% of new loans go to residential borrowers with a DTI ratio above 6, or investors with a DTI ratio above 7. This is because it’s not in the banks’ interest to give loans to people who can’t afford them.

Instead, alongside relaxed LVRs, if the DTIs work as the RBNZ intends, once interest rates fall, they could help keep house prices in check, prevent booms and busts in the housing market, and allow greater certainty and security for Kiwis aiming to buy either a family home, or invest in their financial future via the property market.

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.