The recent moves by the Reserve Bank to finalise its debt-to-income (DTI) restrictions tool has sparked discussion and surprise amongst property investors. Changes seem almost certain to be imposed from about March 2024 and have become an even greater likelihood since the RBNZ’s surprise move to loosen loan-to-value (LVR) ratio restrictions earlier than anticipated.

Here’s where things stand and some key unknowns:

No-one knows what the DTI limits will be. Will the RBNZ introduce a cap of seven times that of income, regardless of borrower type? Could there be exemptions introduced for new builds? Is a speed limit system likely, as per the existing LVR rules?

Banks will look at “all” income and debt when calculating DTIs, incorporating existing loans as well as the potential new mortgage being assessed. The rules will not apply to non-bank lenders.

Impact Of Caps

Given investors’ risk profile and tendency for higher DTIs, the caps are expected to have a greater impact on these buyers more than others. Although more relaxed LVR rules will tend to work in favour of investors, this may be cold comfort. After all, a smaller home deposit simply means a larger mortgage and higher DTI.

So, what would a change in DTIs mean in reality? At a DTI of seven, for someone with an income of $100,000 and existing debt levels of say $350,000, in basic terms the rules would allow for an extra $350,000 of new debt (making total debt of $700,000). For an investor looking at another purchase, the rental stream on that extra property will contribute to income and allow for some additional debt. How much will be decided by each specific lender. However, that simple example illustrates the restraints DTIs could have on investors’ ability to expand their portfolio in the short to medium-term. An extra $350,000 of debt may not go far in today’s market.

Bottom Line

The RBNZ’s modelling suggests someone who already has a large 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, someone 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.