Reserve Bank confirms major changes to mortgage rules
The screws are tightening for home buyers, with the Reserve Bank announcing new restrictions on the amount people can borrow.
The bank confirmed today it will introduce long-signalled Debt To Income ratios (known as DTIs) from July 1 this year.
Both owner-occupiers and investors will face the new restrictions but it’ll be tighter for those wishing to borrow for investment properties.
DTIs are calculated by the total debt divided by total gross income.
The central bank has decided to introduce a DTI of six, meaning any lending over that ratio will come with special rules for banks.
At the same time, it’ll loosen restrictions on Loan To Value ratios (LVRs).
Those limit how much low-deposit lending banks can make. LVR levels have varied since they were first introduced in 2013, when rapidly rising house prices came at the same time as fast growth in low deposit lending.
The aim is to ensure people don’t get themselves into debt they can’t afford.
The bank’s deputy governor Christian Hawkesby said DTIs and LVRs are complementary.
“LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn, while DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt.
“Both act as guardrails reducing the build-up of high-risk lending in the system.
“Having both the DTI and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system.
“Therefore, activating DTIs means that we can ease LVR settings too.”
The new settings allow banks to make 20% of new owner-occupier lending to borrowers with a DTI over six and 20% of investor lending to borrowers with a DTI ratio over seven.
Banks had been given 12 months warning that their systems must be prepared for introducing the ratios.
LVRs will be loosened to allow 20% of owner occupier lending to borrowers with an LVR greater than 80% and 5% of investor lending to borrowers with an LVR greater than 70%.
For example
The Reserve Bank has provided an example of a DTI over six: A couple who earn $135,000 between them but who wish to borrow $800,000 (plus existing other debt of $27,000) would have a DTI of about 6.13.
Under the new rules, a bank can issue up to 20% of its owner-occupier lending to people with a DTI over six. But it does depend how much LVR lending the bank has also made.
When it comes to investors, the high risk DTI threshold will be set at seven.
Exemptions
There will be some exemptions, the Reserve Bank said. Those include (but are not limited to):
- Kāinga Ora loans.
- Refinancing a mortgage, where the new loan value doesn’t exceed the original loan value.
- Portability – this is where you “keep” your home loan when selling, by changing the property securing the mortgage from the old property to the new one.
- Bridging finance.
- Property remediation (for example, leaky home).
- Construction loans – this applies where you are constructing a new home, are purchasing a newly built home from the developer within six months of completion or are purchasing as part of the Government’s KiwiBuild programme.
Reaction from economists
Westpac’s economists were quick to react to the move by the Reserve Bank today.
They said it will have little immediate impact on the housing market – but that could change if house prices were to increase significantly compared to household incomes in coming year, or if interest rates were to fall sharply.
And it could mean regional areas become more attractive to investors, Westpac’s team said. That’s because marked differences in lower-priced regional houses compared to income levels could see them favoured over higher-income regions.
House prices are expected to stay muted for the next few months, with potential for an increase later in the year thanks to an expected drop in interest rates.
