NEW LENDING RULES: Debt-to-income ratio

The Reserve Bank has announced new lending rules regarding debt-to-income ratios. These regulations, set to take effect midway through the year, will restrict most owner-occupiers and first-home buyers from borrowing more than six times their annual incomes.

While this may initially seem like a barrier to purchasing property, I hold the personal opinion that its impact on buyers may not be as severe as anticipated. Notably, exemptions apply to new builds, and banks enforce quotas on mortgage approvals for low-equity owners, mitigating the potential negative effects.

However, investors will bear the brunt of these changes, as they typically leverage house equity for purchases. With the implementation of DTI regulations, investors must now rely solely on their income for mortgage approvals, foregoing the use of equity.

Please continue reading for an overview of the new lending rules.

Income Requirements for Home Buying:

• In Auckland, buyers may need to earn a minimum of $172,000 annually to afford an average-priced house under the new rules. This is $12,000 more than the city's mean household income.

  1. Nationally, buying an average-priced home may require an income of $154,697, which is $27,000 higher than the typical Kiwi household income.

New Lending Rules:

• The new rules, effective halfway through this year, will limit most owner-occupiers and first-home buyers to borrowing no more than six times their annual incomes.

Impact on House Prices and Incomes:

• The rules aim to align house price growth more closely with income growth, preventing significant spikes in house prices.

  1. The aim is to prevent another 40% rise in house prices and tie house prices more closely to income over the long term.

Opportunities for Home Buyers:

• Despite high limits, opportunities for lower-income home buyers still exist, such as buying new-build houses, which may be exempt from the new rules.

  1. Up to 20% of banks' mortgage lending can go to borrowers who don't meet DTI rules.

Implications for Investors:

• Investors can borrow a maximum of seven times their annual income, subject to the new rules.

Challenges and Concerns:

• The new rules may make it harder for buyers as banks lose subjective assessment abilities and adopt a more stringent approach.

  1. Investors may face challenges as they'll need to demonstrate sufficient income rather than rely solely on property value increases.

Expected Timeline and Immediate Effects:

• DTI rules aren’t expected to immediately slow house prices, as high interest rates have already tempered the market.

  1. However, the rules aim to prevent excessive lending during future cycles of low interest rates.