Introducing DTI Restrictions and Loosening LVR’s

The Reserve Bank ( RBNZ ) is charged with maintaining financial stability in the economy … essentially ironing out the peaks and troughs and limiting wild swings that cause boom and bust cycles … that a steady as she goes approach is ultimately the best option.

So it has in place things like the Official Cash Rate ( OCR ) that it dials up and down to speed up or slow down the economy by controlling interest rates and also Loan to Value Ratios ( LVR’s ) to ensure there is equity in properties so in the event of economic contraction and loan defaults in a falling market, that values don’t come under what’s owed to banks essentially destabilising the economy and house of cards it all comes tumbling down … like in the 2008 Global Financial Crisis ( GFC ). So it’s a crisis avoidance mechanism essentially and a good thing to have in place.

LVRs were introduced into NZ in 2013 in response to rapid house price growth and the ratios have been tweaked a number of times in line with the state of the economy ... currently sitting on 65% for investment property and 80% for owner occupied meaning you need either a 35% or 20% deposit respectively … with some exceptions being first home buyers and new build / turnkey properties having lower LVR / deposits as low as 90% / 10%.

We currently also use Uncommitted Monthly Income ( UMI ) calculators to determine how much mortgage lending you can comfortable take on and still have money at the end of the month rather than month at the end of the money and use test rates that are above current market interest rates to ensure the loan would still be serviceable in the event rates did increase, not a bad strategy. For example while interest rates were briefly around 2% in mid 2021, the test rates were factored at 7.25% and guess what … they’ve come off fixed term of 2% onto floating rates at 8.6% or refixed 12 months at 7.35% so yes … it’s a good strategy.

The Reserve Bank however is currently in consultation to look at easing LVR’s and at the same time introducing Debt To Income ( DTI ) restrictions that again keep a cap on the amount of lending that can be undertaken by an individual. These are currently in place in other countries and given the price of properties in NZ are looking to be set at around 6 times your gross monthly income for owner occupied and 7 for investment so therefore a $100k pa income would afford you a $600k loan for owner occupied plus whatever deposit you had, less any other lending on things like vehicles, personal loans and credit cards, ( so its total debt ) at time of application to determine how much house you can buy as an over simplified example.

These consultations will close on 12th March 2024 to then consider the feedback and decide on the activation and initial settings of the DTI tool with communication of decisions in the middle of the year.

So we hurry up and wait in the knowledge there’s likely going to be a relaxing in LVR settings and DTI’s introduced … by then we’ll also know a bit more about OCR settings and impending relaxing of interest rates.

Is it going to make a lot of difference to the amount you and I can borrow on our income? … it will vary case by case but likely not a lot given the current LVR / UMI combination determining the appropriate level of lending … its likely just another way of getting to a similar result but we’ll see when the details are released.

Some non-bank lenders have higher LVR appetite for the likes of investment property as they’re not as restricted by the RBNZ rules imposed on main banks but still have their own in house criteria to meet to protect their investment which just makes sense, the ones that do take on more risk also charge rates accordingly but some are very similar to main banks as well.

So it’s a case of watch this space and we’ll keep you posted as proceedings develop.