A property finder is urging investors to consult their mortgage adviser about their buying power and how it might be impacted by debt-to-income (DTI) restrictions the RBNZ will probably implement about mid-year.

“Some investors will need to make their next purchase before mid-year,” says Nick Gentle, of iFind Property. By then banks will probably be able to lend only 20 per cent of their residential loans to investors with a DTI greater than seven times their incomes, if DTIs are introduced.

On average the DTI ratio now is between three and four-times income as high interest rates bite. For the average mortgage borrower, the DTI restrictions won’t have much effect, but there will be some people (5-10 per cent) who will be affected at the margins and won’t be able to get a mortgage.

Risk Profile

CoreLogic’s chief property economist Kelvin Davidson says given investors’ risk profile and tendency for higher DTIs, the caps are expected to have a greater impact.

“The natural response to the impending system changes could be for investors to bring forward their buying decisions and get into the market ahead of the DTIs, particularly if they already have a substantial portfolio of properties,” he says.

“The RBNZ’s modelling suggests that somebody who already has a portfolio in the range of seven to 10 properties and therefore higher existing debt levels, may not be able to secure their next property for a decade after a DTI system has been imposed.

“Similarly, somebody with a small portfolio of one to two properties may not be able to add their next one for at least five years. The bottom line is income needs time to grow to service higher debt levels.”

This in turn could contribute to a floor under current house price falls (for better or worse), alongside other factors such as flattening mortgage rates, rising net migration, and LVR loosening.

Non-Bank Lenders

Alternatively, says Davidson, as no strangers to risk, more investors could also look to non-bank lenders to fund their future purchases.

But even if house prices stabilise soon, he doesn’t think they’re about to boom again, not least because DTIs will tend to dampen any future cycles, while mortgage rates are also likely to be “higher for longer” over the next few years.

The new rules only count if borrowers are buying an existing property. DTIs will not impact mortgage applications for new builds.

Banks will look at debt and income, so if an investor is earning $100,000 in salary and $30,000 in rent, their income will be assessed as $130,000 in any calculation. It is then multiplied by seven.

Debt includes everything – mortgages, credit cards, personal loans and student loans. 

Davidson says it’s important to note that high DTI lending has fallen sharply over the past 12-18 months as house prices have fallen, incomes have risen, risk tolerance has reduced and mortgage rates have increased, which has limited debt servicing levels.