DTI adds workload, requires client education
On July 1, the Reserve Bank of New Zealand's new debt-to-income (DTI) ratios were implemented, changing the game for mortgage advisers and their clients.
For owner-occupiers, borrowing is capped at six times the household income while property investors are capped at seven times their annual household wage.
However, the DTI ratios will be felt differently across the country, according to analysis by realestate.co.nz, leaving advisers to deal with the unique repercussions within their space.
Location, location, location
While the DTI ratios were implemented for lenders nationwide, in many regions of New Zealand, the significant gap between household incomes and what will be required under the new DTI regulations is likely to be more challenging in some areas than others.
Based on realestate.co.nz’s 12-month national average asking price of $902,988, property seekers will need a household income of $120,398.
Assuming a 20% deposit, this is calculated by dividing the total loan amount of $722,390 by six, per the new DTI regulations. This $120,398 is just $6,0411 less than the average annual household gross income of $126,411.
Queenstown was the most expensive district in which to buy property, with a 12-month average asking price of $1,953,091. Under new DTI requirements, property seekers wanting to borrow 80% on property in this region would need a minimum household income of $260,412.
Waiheke Island followed with an average price tag of $1,901,507, requiring an income of $253,534. Wanaka, Rodney and North Shore City rounded out the top five, needing incomes between $175,544 and $245,381.
Vanessa Williams (pictured above centre), spokesperson for realestate.co.nz, attributes the high prices to lifestyle appeal.
"These districts offer a blend of urban and rural lifestyle options and, in most cases, are an easy boat ride, flight, or drive to our main commercial hub of Auckland,” Williams said.
In terms of Auckland, only four of nine districts had the average minimum required income needed to service a loan that fit within Auckland’s annual gross income of $153,159.
Based on having a 20% deposit, property seekers would need a minimum household income of $108,796 in Papakura, $119,841 in Waitakere City, $132,111 in Manukau City, and $139,480 in Franklin.
At the affordable end of the spectrum, Bay of Plenty’s Kawerau was the lowest-cost district, with a 12-month average asking price of $432,604.
To meet DTI ratio requirements and borrow 80%, an income of $57,681 per annum is required. With average asking prices around $450,000, Grey on the West Coast and Southland’s Gore came in a close second and third, requiring household incomes of around $60,000.
Will DTI’s cause the property market to slow down?
With the new regulations designed to limit excessive debt, some might question whether it may reduce the number of buyers by limiting their options.
At this stage, mortgage adviser Satyan Mehra (pictured above right) said the changes will have minimal effect in the near future.
“Currently, the maximum DTI for lending is around 5-5.5 times given that stress testing rates are in the mid-8s,” said Mehra, director of iConsult. “When I look back at the good old covid days, with interest rates around 2%-3% - the DTI lending was circa 7-7.75. Now what are the odds of interest rates hitting similar levels any time soon?”
Williams agreed, saying that with high interest rates, she doesn’t expect DTI ratios to start biting immediately.
“Some Kiwis are unable to enter the market currently due to high interest rates, and that will likely continue to be the case,” Williams said.
“The idea of DTI ratios is to slow down the market and, ultimately, help prevent people from getting into unmanageable debt, which isn’t necessarily a bad thing. We will have to wait and see what impact this has overall.”
Looking back further, Mehra said interest rates on average has been around 5%-6%, meaning assessment rates were around 7%.
“With that view, the impact of DTI may be rather low,” Mehra said.
In saying that, Mehra said the opening up of LVRs will probably boost some lending.
“These effects will counter each other.”
How are advisers and lenders reacting to the DTI changes?
With the DTI framework announced in late May, borrowers, advisers and lenders have had just over two months to adjust for this moment.
So far, Mehra said the market has seen some lenders come out with new calculators and added some “additional bits” around capturing student loan amounts.
“We have also seen some lenders change calculators and now wanting to dig a little bit more in terms of business financials,” Mehra said. “All of this was expected once DTIs were announced.”
Gary Lin (pictured above left), a mortgage adviser from Opes Mortgages in Auckland, has found borrowers somewhat unaware of the changes and what they mean after recent discussions with his clients.
“Some investors are thinking that the 7x DTI means investors can borrow more in today's NZ lending environment,” Lin said. “That's not quite true, unfortunately.
“Banks have started coming out of their lending policy changes regarding DTI. But the common trend is that DTI is an additional requirement, and debt servicing policies that have governed bank lending for decades is to remain,” Lin said.
Lin said that despite the new DTI limits being higher, the current high mortgage rates mean banks are servicing at around 9%.
“This means investors and homeowners can only borrow around 5x DTI today,” Lin said “For banks to truly lend at 7x DTI for residential property investors, interest rates will need to drop to approximately 4.5-5%. This is equivalent to the mortgage rates around 2018-2019.”
The bottom line
In short, Lin agreed that the new DTI will have minimal effect now and will only affect lending when mortgage rates come down.
And while Mehra said it would add a little more to the workload, it was not something he was overly concerned about.
“End of the day, as advisers, our role is to understand the requirements, break it down for clients, and get the job done,” Mehra said. “The rest will be the test of time, once we see it being more widely accepted and seeing how banks react to it.”
