Reserve Bank Considers Introducing New Mortgage Rules to Safeguard Homeowners and Banks

Date Published: 24 January 2024

Key Facts

• The Reserve Bank is considering the introduction of debt to income restrictions (DTIs) and revisions to loan to value ratios (LVRs) for residential lending.
• DTIs are a metric that banks can use to determine loan eligibility. The lower the DTI, the more likely an applicant can secure a home loan.
• The proposed rule change would limit banks to giving only 20% of their mortgages to homeowners with a DTI above six and 20% their residential loans to investors with a DTI higher than seven.
• The Reserve Bank reported in September 2023 that about $1.6 billion of the $5.2 billion of new mortgages in recent months had been to DTIs above five.
• The objective of introducing DTIs is to shield banks and borrowers from the potential risk of a drastic correction in the housing market.

Article Summary

The Reserve Bank is mulling over altering its rules for retail bank mortgage lending. One aspect under discussion is the introduction of debt-to-income (DTI) restrictions. A lower DTI generally enhances a potential borrower’s chances of securing a home loan. Under the proposed changes, a maximum of 20% of a bank’s mortgages could be granted to homeowners who have a DTI higher than six. In simpler terms, this implies that the maximum loan accessible to an applicant will be six times their annual earnings.

Nevertheless, the proposed changes don’t only impact homeowners. Similarly, banks would only be able to allocate 20% of their residential loans to investors with a DTI higher than seven. Recent figures provided by the central bank suggest that the total value of new mortgages issued to borrowers with DTIs above five was approximately $1.6 billion of the $5.2 billion total, indicating that this isn’t a significant issue currently.

Meanwhile, the Reserve Bank has repeatedly warned of the potential risks of higher interest rates, the growing cost of living, and declining house prices, creating conditions for heightened mortgage stress amongst a larger section of the population. The intention behind introducing DTIs is to secure protections for both banks and consumers from a sharp decline in house prices. These reforms are set against the backdrop of fluctuating house prices in New Zealand, with a recent slight recovery following a gradual decline.

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