Understanding the New Debt-to-Income Restrictions: What You Should Know Before Borrowing.
Understanding the New Debt-to-Income Restrictions: What You Should Know Before Borrowing.
From the 1st of July 2024, there will be some new restrictions when it comes to home loans.
The Reserve Bank of New Zealand (RBNZ) has confirmed that it will introduce Debt-to-Income Restrictions (DTIs). The new DTI settings allow banks to make:
20% of new owner-occupier lending to borrowers with a DTI ratio over 6; and
20% of new investor lending to borrowers with a DTI ratio over 7.
Loan-to-Value (LVRs) will also be eased to allow banks to make:
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%.
While both owner-occupiers and investors will face the new restrictions, it'll be tighter for those wishing to borrow for investment properties.
In this article, we will delve into the concept of DTIs, explore their potential impact on you as an owner occupier and/or investor and provide some helpful tips to improve your chances of securing a home loan.
What exactly are DTIs and How Are They Calculated?
Debt-To-Income ratios (DTIs) tie the amount you can borrow to your income.
DTIs are calculations used by lenders to determine the maximum amount an individual or household can borrow based on their income.
It’s a tool designed to assess the borrower's ability to manage their debt obligations and reduce the risk associated with excessive borrowing i.e defaulting on your mortgage payments.
DTIs are calculated by dividing your total debts by your gross annual 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 to a lender.
For example, if you owned your own home and had $10,000 worth of short term debt plus a $500,000 mortgage and your combined household income was $120,000, your DTI ratio would be 4.25 - meaning your debt is 4.25 times your income, which is well within the DTI limit of 6.
Potential Impact on Homebuyers & Investors
At the moment interest rates are high, which means “stress test rates” are high, so it's hard to borrow a lot of money right now.
But when interest rates fall, the impact of DTI's will start to be felt as you won't be able to borrow as much as you otherwise could.
For example:
If you and your partner earn combined income of $100,000 a year, the maximum you will be eligible to borrow is:
$600,000 if you are an owner-occupier
$700,000 as an investor
Investors typically have higher DTIs than owner occupiers so it’s expected this group will be more impacted by the effects of DTI restrictions. For an investor looking at another purchase, it may restrict them from expanding their portfolio in the short to medium term.
Exemptions to DTI Restrictions
There’s always an exception to the rule, so while DTI restrictions will apply to most borrowers purchasing an existing property, there are exemptions:
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 (e.g leaky home).
Construction loans - when you are constructing a new home or purchasing a newly built home from the developer within 6 months of completion or are purchasing as part of the KiwiBuild programme.
These exemptions aim to support the growth of new housing supply and encourage investment in the construction sector.
What Can You Do to Improve Your DTI Ratio?
When these new rules come into effect on the 1st of July 2024, it might pay to get yourself into a good position if you are thinking about buying a home, upgrading to a new one or expanding your property portfolio.
Here are some things to start thinking about now, in order to help improve your debt-to-income ratio:
Reduce Your Expenses
Reducing your monthly expenses can free up more money to pay off debt and improve your DTI ratio. Try to cut back on unnecessary expenses, shop around for cheaper internet and electricity or get a flatmate to help with the rent or current mortgage payments.
Increase Your Income
Increasing your income can lower your DTI ratio. Remember, DTIs tie the amount you can borrow to your income. You could look at negotiating a pay rise, find a higher-paying job, or start a side hustle to generate additional income.
Consolidate Debt or Pay It Down If You Can
Consolidating multiple debts into one loan at a reduced rate can lower your monthly payments, freeing up more cash to pay down your total debt which will improve your DTI ratio. However, the ultimate DTI improver is to pay off that high-interest debt first like credit cards, car loans or personal loans. Get in touch if you would like us to arrange a debt consolidation loan for you!
The Importance of Working with a Mortgage Adviser
Navigating the complexities of potential DTI restrictions and their implications requires expert guidance.
This is where working with a Mortgage Adviser can help in assisting you to understand the rules, assessing your borrowing capacity, and identifying lenders who may be more flexible or offer better terms. Feel free to reach out to the team if you need a hand.
