While we’re starting to think the Reserve Bank may be crying wolf about continuing to increase interest rates at the next few meetings in February and April, one thing they are now quite sure about is integrating the debt-to-income ratios, or DTI’s, within the next 12 months.
I’ve fielded a lot of calls from those in my network over the last month or so, concerned about the upcoming changes from a lending perspective, and I think there is also a lot of confusion about what DTI’s actually mean.
So what are DTIs?
Essentially this refers to the ratio of money you can borrow with respect to your income, and it’s looking like this will be set at seven times overall income for owner occupiers, and six times overall income for investment property lending. This means the ratio of what you can borrow will differ slightly depending on whether you’re purchasing rental property or a place to live.
Debt is counted as everything you owe (home lending, personal loans, credit cards), and income is your income from all sources, including business income and dividends.
On that simple basis owner occupiers would need $100,000 income for a loan of $600,000 and investors $100,000 for a $700,000 loan.
But as they often are, the banks are already one step ahead with their servicing calculators and the lending credit policy already in place to protect downside risk. Modelling has been going on in the background for several years since debt-to-income ratios were first discussed, and most banks have kept this in mind when developing their requirements.
We’ve done some work around what this actually means for borrowers, because it seems there are numbers been thrown around left right and centre, and when uncertainty arises, it’s always useful to have some solid foundations to fall back on.
For owner-occupiers (first home buyers, anyone buying and selling and owning a single property), bank calculations are already setting a ceiling at 15-25 per cent less than a DTI would dictate.
For investors (multiple property owners), they’re already 25-30 per cent lower than they would be able to borrow if DTI’s were imposed today.
This effectively means there will be very little impact of DTI’s on the existing levels of borrowing, due to current serviceability restrictions and bank policy requirements.
It’s worth noting this may change as interest rates drop, lending policy evolves and bank modelling indicates variance in overall lending rates, but for now, there will be few, if any changes to what people can actually borrow when looking to purchase a new home.
So, in a nutshell, DTI’s are unlikely to have a large effect on property values and the market as a whole, but even so, we’ll be keeping a close eye on these changes and how they affect borrowers across the longer term.
And we’ll soon find out from the Reserve Bank whether there’s really a wolf in NZ’s financial landscape, or if the warnings of the committee for the past few months have been enough.
