Yesterday was the first time some people had heard of DTIs and LVRs – but a mortgage adviser says they're basically just the Reserve Bank's way of helping people avoid unmanageable debt.
The bank yesterday confirmed it would introduce long-signalled Debt To Income ratios (known as DTIs) from July 1 this year.
DTIs were calculated by the total debt divided by total gross income. The central bank has decided to introduce a DTI of six, meaning any lending over that ratio would come with special rules for banks.
At the same time, it would loosen restrictions on Loan To Value ratios (LVRs).
Mortgage adviser Sara Hartigan said the Reserve Bank's latest move was about preventing people getting into unmanageable debt.
"It can be unmanageable and it can be quite frightening," she told Breakfast this morning. "So basically, the Reserve Bank has come in and said that people who are going to borrow for a home loan can borrow six times their salary.
"Whereas before, especially in the heyday where the market was booming in 2021, 2022, people were taking out big loans – and now it has become somewhat of a point of crisis."
She urged people struggling with repayments to budget carefully, not do anything rash, "hunker down" and "sit out the cycle".
"Maybe they're not going on that overseas trip, maybe they're just popping down to Rotorua," Hartigan suggested.
"Maybe the new car has to wait for a couple of years.
"But the good thing about New Zealanders, we always prioritise paying the mortgage first – so I think it's a lot less brunch date and a lot more home."
Cities were more affected by the introduction of DTIs, she added, because houses in the regions were typically cheaper.
"But you've got your Auckland, your Christchurch, where the house prices have just been climbing at an unsustainable rate.
"It's getting to the point where the incomes aren't matching what the capital growth is, and so the Reserve Bank is kind of trying to put the brakes on it," Hartigan said.
It could lead to more families buying together, she added, giving the example of a mother, father, daughter and son-in-law all going in on a mortgage and a property together.
"You're also gonna have to see the bank of mum and dad stepping up and maybe helping out with the deposit," Hartigan acknowledged.
"And I think people really need to think hard about Kiwisaver, because that's where most of the deposits we see are coming from.
"People aren't great at saving."
What about that other acronym?
Loan To Value ratios (LVRs) limit how much low-deposit lending banks can make.
Again, the aim is to ensure people don't get themselves into debt they can't afford.
An LVR is calculated by dividing the loan amount by the value of the property.
"Basically, that's the amount of loan that you can borrow versus the value of the home," Hartigan explained.
"The Reserve Bank is just trying to slow the market down a bit."
The bank's deputy governor Christian Hawkesby yesterday explained that "activating DTIs means that we can ease LVR settings".
The new settings allow banks to make 20% of new owner-occupier lending to borrowers with a DTI over six and 20% of investor lending to borrowers with a DTI ratio over seven.
LVRs will be loosened to allow 20% of owner occupier lending to borrowers with an LVR greater than 80% and 5% of investor lending to borrowers with an LVR greater than 70%.
For example
The Reserve Bank yesterday provided an example of a DTI over six: A couple who earn $135,000 between them but who wish to borrow $800,000 (plus existing other debt of $27,000) would have a DTI of about 6.13.
Under the new rules, a bank can issue up to 20% of its owner-occupier lending to people with a DTI over six – but it does depend how much LVR lending the bank has made as well.
When it comes to investors, the high risk DTI threshold will be set at seven.
SHARE ME