The Reserve Bank is proposing to introduce Debt to Income (DTI) restrictions from around the middle of 2024.
These new DTI restrictions will set limits on the amount of debt borrowers can take on compared to their incomes. These new restrictions will in turn protect the stability of the financial system.
Debt to Income Ratio (DTI) – what is it?
Debt to Income Ratios (DTIs) are calculations used by lenders to determine the maximum amount you can borrow based on your income.
DTIs are calculated by dividing your total debts (eg. mortgage + credit card limits + finance loans etc) by your total income (before tax) to give you a ratio number. The higher the number, the higher your debt is relative to your income and therefore considered a higher risk.
For example – if you had a $500,000 mortgage + $20,000 credit card limit + $30,000 student loan, and your income was $90,000 pa, you would divide $550,000 (being the total debt) by $90,000, to get a DTI ratio of 6.11 – meaning your debt is 6.11 times your income.
If the DTI limit was set at 6 with the bank, then you would be outside the limit and you would need to look at reducing your debt or increasing your income before you could get any extra lending.
What DTI restrictions is the Reserve Bank proposing?
The Reserve Bank is proposing to restrict banks mortgage lending to –
- 20% of residential loans to owner-occupiers with a DTI greater than 6; and
- 20% of residential loans to investors with a DTI greater than 7
While DTI restrictions are expected to apply to most borrowers, there are potential exemptions, like new-builds and Kainga Ora’s First Home Loan Scheme.
If you’re considering purchasing a property, we recommend you speak with one of the our experienced Mortgage Advisers who can assist you with understanding the new DTI restrictions and to assess your lending ability.
