Brokerage, property economist share their views
If a debt-to-income tool is introduced by the Reserve Bank, it will tie borrowing to income and take into account any other existing debt, a mortgage adviser says.
Given that house price growth has slowed, CoreLogic said that if the tool was introduced, it would likely have more of an impact in the next property cycle.
DTI restrictions set limits on the amount of debt borrowers can take on relative to their income, and the restrictions are in the Reserve Bank toolkit. On April 3, the Reserve Bank released its finalised debt-to-income framework, outlining the technical specifications that banks will need to comply with if a DTI tool is activated.
Rachael Thompson (pictured above left), known as the “Smarter Mortgage Lady” and financial adviser at ILG Mortgages, told NZ Adviser that some lenders already incorporated DTI restrictions in their servicing calculators.
“When clients have higher debt and lower deposit and are trying to refinance a year or two later, it is exacerbated by the current property market (lower house prices),” Thompson said. “It pushes up the LVR and therefore risk, meaning lenders are less inclined to want to lend to someone in this position.”
Thompson said that while a DTI tool would provide greater protection for borrowers, applicants who had taken on expensive debt would likely find it more challenging to get finance approved.
“It will limit approvals for applicants with high short-term debt from taking on a mortgage and therefore buying a first home,” Thompson said.
If the tool is introduced by the Reserve Bank, Thompson said that it would go further to ensure that borrowers aren’t able to buy outside of their means.
“For example, when one party is on maternity/parental leave and therefore has a reduced income for a period of time that the borrowers have allowed for in their own plan, DTI will potentially affect them executing this,” Thompson said.
Additionally, she said that demand for expert advice from mortgage advisers would likely increase.
“I think more people will be driven to get advice, as things get a little more complicated or challenging,” Thompson said.
CoreLogic chief property economist Kelvin Davidson (pictured above right) said that as DTIs were in the Reserve Bank toolkit, it seemed likely that the restrictions would be imposed.
Key rules such as whether DTI limits would be a cap of six, seven or eight times that of income are currently unknown, Davidson said. The Reserve Bank is likely to incorporate a speed limit system similar to LVR restrictions (e.g. an exemption for new builds), and non-banks will be exempt from the restrictions, he said.
As house prices have come down, Davidson acknowledged that borrower debt levels were correspondingly lower, while incomes had risen.
This indicated there is currently less of a need for the DTI restrictions, meaning it’s likely they’ll be more effective in the next cycle.
“Even if they do impose them, I’m not sure that they’ll bind in the sense that high debt-to-income lending has already come down,” Davidson said. “Higher mortgage rates naturally limit how much debt borrowers can service.”
Davidson said DTI limits would tie house prices more closely to incomes, putting “quite a hard stop” on the number of properties that anyone can own.
Reserve Bank modelling showed that DTI restrictions would likely hamper investors more than owner-occupiers. Investors with existing property portfolios would be more reliant on income growth as a means to add to their portfolio, he said.
“It covers full debt, so it covers what [borrowers] have already got, as well as the new loan they’re thinking about,” Davidson said.
For example, where a borrower earns $100,000, assuming the DTI is seven times’ income, the maximum they can borrow is $700,000. While income from a new rental would count towards income, he said it would still take time to build.
“If [a borrower has] $350,000 against their own property and $350,000 against a rental, they’re already tapped out, therefore the only way to buy the next property is for income to rise,” Davidson said.
The Reserve Bank had previously indicated that if and when they introduce DTI ratio caps, they would likely correspond with a loosening of LVR restrictions.
Instead, LVR restrictions have eased earlier (from June 1), and the timing looks set for March/April for DTIs.
The Reserve Bank said that if DTI restrictions were formally introduced, banks would be given 12 months to prepare, and that the earliest date was likely to be March 2024.
