It’s time to get ITK about DTIs
It’s time to get ITK about DTIs
A lot happened in 2024 – from Donald Trump winning the US election, to Charli XCX’s Brat summer, the Paris Olympics, and Crocs solidifying their position as a must-have fashion item. But in amongst these cultural moments, did you miss the Reserve Bank’s move to introduce debt-to-income (DTI) ratios?
While their impact on the housing market may not have been felt yet due to the high interest environment and banks’ stress-testing rates, as the Official Cash Rate (OCR) continues its downward trend, it’s worth budding home buyers getting up to speed on DTIs.
So what are DTI ratios?
Introduced by the Reserve Bank in July 2024, DTI restrictions apply to new residential lending for both owner-occupiers and investors. Their primary goal is to keep the New Zealand housing market on an even keel, with affordability in a comfortable position rather than the ‘boom and bust’ cycle we last saw through the pandemic years of 2020-2021 – something we can likely all agree is a good thing!
Lenders use DTIs to assess a borrower’s ability to meet their debt repayments by looking at the amount of debt an individual, a couple, or other grouping has relative to their gross (before tax) income.
Under the restrictions, the DTI threshold for owner-occupiers is six times a borrowers’ gross income, minus any debt, and seven times for investors. Banks are only allowed to lend a maximum of 20% of their total loans to borrowers with a DTI ratio greater than these limits.
These DTI measures sit alongside the loan-to-value ratios (LVRs) that were already in place (but tweaked in 2024), also set by the Reserve Bank to limit how much low-deposit lending banks can provide.
How do the DTI calculations work in practice?
Great news – you don’t have to be a maths whiz to work out your DTI ratio. Here’s a straightforward example, following a couple, Emily and Pete, who are looking to purchase their first home:
· Emily and Pete’s gross joint annual income is $150,000.
· Emily has a student loan of $10,000.
· Pete has a credit card with a $2,000 limit –banks look at this limit rather than any outstanding balance.
· On top of this existing debt, Emily and Pete want to borrow $700,000 to buy their first home.
Their DTI ratio is $12,000 (existing debt) + $700,000 (new debt) divided by $150,000 (their gross income), which equals 4.74. So, provided everything else lines up with the lender, under the DTI rules Emily and Pete would be able to take out their new $700,000 mortgage – with their deposit on top – as their DTI sits under 6.
If you’re an investor, your rental and/or boarder income will be included in your gross income. However, banks do scale this to roughly 75% for rental income, and 80% for boarders (but this varies from bank to bank). The calculations for investors can be a bit trickier, so reach out to our team if you need help.
Are there any exemptions to DTIs?
Yes – the biggest one being that they don’t apply to new builds, only existing properties. Other exemptions include Kainga Ora loans, refinancing, bridging finance, property remediation and construction loans.
I’m a budding home buyer – should I worry about DTIs?
Right now, the short answer is most likely no. As we said earlier, most would-be home buyers can’t borrow enough to activate the DTI rules due to the banks’ higher stress-testing rates.
However, the Reserve Bank is currently engaged in a cycle of rate-cutting, which it has forecast to continue until approximately the end of 2025, or when the Bank feels the OCR has reached its neutral position. So, as the OCR comes down and interest rates also decrease, DTIs could well make their presence known later this year – particularly for investors.
For those putting plans in place to purchase a home in 2025, we recommend you use the calculation detailed above to work out your DTI. For most, it will give you some confidence going into the home-buying process – and after all, being forewarned is being forearmed.
If your situation requires a more complicated calculation, don’t hesitate to get in touch with our Total team – we’re happy to do the maths for you.
Most importantly, if your DTI calculation works out higher than the threshold – don’t panic! We’re here to work through any potential hurdles and get you into your new home.