This limits higher-risk mortgage lending
The Reserve Bank of New Zealand has released its final debt-to-income (DTI) restriction framework, which it could impose on banks from March next year.
“DTI restrictions on residential mortgage lending, when implemented, set limits on the amount of debt borrowers can take on relative to their income,” said Kate Le Quesne (pictured above), director of prudential policy. “This supports financial stability by limiting higher-risk mortgage lending, thus reducing the likelihood of a future housing-related financial crisis.
“This, in turn, helps us to meet our statutory objective of ‘promoting the maintenance of a sound and efficient financial system.’ By linking credit availability to income growth, DTI restrictions complement other tools we use to support financial stability, including loan-to-value ratio (LVR) restrictions on residential mortgage lending.”
The publication of the framework does not immediately activate DTI restrictions. Rather, it provides banks with clarity in terms of the definitions of debt and income and future data reporting requirements and gives them 12 months to prepare their systems for possible implementation of DTI restrictions.
The decision to add DTIs to RBNZ’s macroprudential policy toolkit was announced in April 2022, followed by a public consultation on the exposure draft of the DTI framework in November 2022.
“Stakeholders were generally supportive of the proposed design of the DTI framework and agreed with our overall approach to keep the framework simple and clear,” Le Quesne said.
The finalised DTI framework is being released along with a regulatory impact statement, non-technical summary, and a summary of submissions document that contains the central bank’s responses to the key issues raised in the consultation.
RBNZ said matters clarified in the framework include the treatment of personal debt in DTI calculations, the calculation of business income, and the treatment of complex lending situations.
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