In response to the extended economic instability, the Reserve Bank has introduced new restrictions on high debt-to-income (DTI) lending that retail banks can provide on mortgages.

Debt-to-income ratios can be described as the amount of debt a borrower can take, corresponding to their pre-tax income. For example, borrowing three times your income will mean you have a DTI ratio of three.

The Reserve Bank has announced new DTI rules, effective 1 July 2024, which allow banks to lend:

  • 20% of new owner-occupier lending to borrowers with a DTI ratio greater than six; and
  • 20% of new investor lending to borrowers with a DTI ratio greater than seven.

There are a handful of available exemptions to the DTI rules, including:

  • Kāinga Ora loans;
  • Refinancing, where the new loan value doesn’t exceed the original loan value;
  • Portability, where you retain your mortgage when selling a property by changing the property over which the mortgage is secured. This exemption will only apply if the value of your new loan does not exceed the value of the original loan for the initial property;
  • Bridging finance;
  • Property remediation (like leaky homes);
  • Construction loans, including new home construction, purchasing a new-build from the developer within 6 months of completion, and Kiwibuild properties.

In essence, this means that the lending will be considered ‘high-DTI’ if it exceeds the applicable thresholds and there are no exemptions which apply. This further guidance has been applied to ensure that banks do not take on excessive risk, alongside the Reserve Bank’s mandate to maintain financial system stability in New Zealand.

It is important to consider how this may affect your lending arrangements, as the Reserve Bank has mentioned there is potential for the DTI thresholds to fluctuate over time, although it will not apply to non-bank lenders.

As all banks will be able to provide 20% of their loans to those with high DTI ratios, it may be worth shopping around if you are in this category or engaging the services of a mortgage broker to shop around for you.

It is important to take financial advice whenever you are considering entering into a new mortgage.  Your legal advisor can help you register a new mortgage when you buy a new property or refinance.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Therese Greenlees and Raiyan Azmi