New Financial Guardrails: RBNZ’s New DTI and LVR Policies

The Mortgage Supply Co

May 30, 2024

Yesterday, The Reserve Bank of New Zealand (RNZ) made the bold move to implement Debt-to-Income (DTI) restrictions while loosening Loan-to-Value Ratio (LVR) rules. These changes will reshape how banks lend to homeowners and investors and will take effect 1st July 2024. Here’s what you need to know.

The new DTI settings will 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

LVRs will 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%

Why the change?

While LVRs reduce the impact of potential defaults during a housing downturn, DTIs aim to prevent defaults by ensuring borrowers’ ability to repay their loans. Together, they act as “guardrails”, to prevent and reduce high-risk lending. For more details, read the RBNZ’s announcement HERE.

How will this impact banks and borrowers?

Banks have been preparing for these changes, with a 12-month window given to adapt their systems for the new DTI rules. They also have a 6-month period to ensure their lending practices comply with these new regulations. The new DTI restrictions includes an allowance for banks to do 20% of their lending outside specified limits to accommodate for complex cases.

The impact in the interim on borrowers will be minimal. Before DTI thresholds are reached, the bank servicing rates are still at a level where they will limit loan amounts before the DTI calculation. However, these measures will cap capacity to borrow when test rates are low. Historically, low rates and easy access to lending have fueled property booms and its this that the Reserve Bank is looking to avoid in the future.

RBNZ’s new DTI and LVR policies are more than just regulatory updates – they are strategic moves to ensure a robust financial system capable of withstanding economic fluctuations. As these changes come into effect, both banks and borrowers will need to navigate this new landscape, balancing both opportunity with responsibility.

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