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Debt-to-income (DTI) restrictions explained

We are setting new debt-to-income (DTI) rules for banks on home lending. Banks will need to follow the rules from 1 July 2024, for home lending they make from that date onwards.

Introducing debt-to-income (DTI) restrictions

From 1 July 2024, banks will need to comply with new debt-to-income (DTI) restrictions, set by the Reserve Bank. These restrictions will apply to new lending for residential homes in New Zealand, for both owner-occupiers and investors.

DTI is a measure used by lenders to assess a borrower’s ability to meet their debt repayments. A DTI ratio looks at the amount of debt the borrower has, relative to their gross (before tax) income.

Some banks already carry out DTI assessments when considering home loan applications. Our new rules will set out standard restrictions which banks need to follow.

The DTI rules are additional to the existing loan-to-value (LVR) rules, which set out how much low-deposit lending banks can make.

DTIs explained

Watch our Director of Prudential Policy Kate Le Quesne explain why we are introducing DTI rules and what this means for potential borrowers.

Audio and text on screen: You might have heard about Debt-to-Income restrictions recently, but what are they, and what do they mean for New Zealanders?

A Debt-to-Income ratio or DTI for short, looks at how much debt a borrower has compared to their yearly income before tax.

Here at the Reserve Bank, we are setting new DTI rules for banks on home lending. These rules will apply from the 1st of July of this year.

Text on screen: Why are DTI rules needed?

Audio: The Reserve Bank is responsible for maintaining the stability of the financial system in New Zealand. One of the ways we do this is with macroprudential tools.

DTIs are a type of macroprudential tool and are meant to make sure that banks don't take on too much risky lending during economic booms, which could result in a wave of defaults during an economic downturn.

You've probably already heard of loan-to-value ratio, or LVR rules, which set a limit on how much low deposit lending banks can do. LVR rules are another type of macroprudential tool and will stay in place alongside the DTI rules.

Text on screen: So what are the new DTI rules?

Audio: Under the new DTI rules banks will be able to make a maximum of 20% of new owner occupier lending to borrowers with a DTI ratio over 6 and 20% of new investor lending to borrowers with a DTI ratio over 7.

This means you won't be impacted by the DTI rules if you borrow less than 6 times what your household earns before tax in a year as an owner occupier or 7 times your income as an investor.

A bank will still be able to lend above these DTI thresholds. but it will depend on how much high DTI lending it has already made in a given period.

Let's take an example of a family looking to buy their first home. This family has an annual pre-tax income of $120,000, with $20,000 of existing debt. Since they intend to occupy the property, a DTI threshold of 6 will apply. This means they could borrow up to $700,000 before they are considered high DTI. This is 6 times their yearly income, minus that $20,000 of existing debt. The bank could, of course, decide to lend more or less than this figure. And this is because for all borrowers, the bank decides how much to lend and will apply other lending rules and criteria too. Again, it’ll also need to look at how much high-DTI lending it’s already made.

Text on screen: Are there any exceptions to these new restrictions?

Audio: DTI restrictions won't apply to construction loans for new builds, bridging finance, Kāinga Ora loans, refinancing your mortgage and property remediation loans. We have a full list of exemptions on our website.

For more information, visit the Reserve Bank website. You can, of course, also talk to your bank.

What are the new DTI restrictions?

The new DTI rules will allow banks to lend:

  • 20% of owner-occupier lending to borrowers with a DTI ratio greater than 6
  • 20% of investor loans to investors with a DTI ratio greater than 7.

These ‘speed limits’ allow a portion of banks’ new lending to go towards home loans that exceed the DTI thresholds (also known as high-DTI lending).

Banks will also consider other lending rules and their own lending criteria and carry out their own affordability assessments. These will influence whether they decide to lend to a prospective borrower or not, and the amount they will ultimately lend.

When will borrowing be considered high-DTI?

Borrowing will be considered high-DTI if it exceeds the DTI threshold.

Owner-occupier

Borrowing over 6 x gross (before tax) income, minus any debt, is considered high-DTI.

Investment

Borrowing over 7 x gross (before tax) income, minus any debt, is considered high-DTI.

Take the example of a household with a total annual income of $120,000 and total debt of $20,000. If they borrow over $700,000, they will be considered high-DTI.

6 x $120,000 - $20,000 = $700,000

Why are the DTI rules needed?

We are responsible for maintaining financial system stability in New Zealand. We use what are called 'macroprudential tools' to ensure that banks do not take on too much risk.

A DTI restriction is a type of macroprudential tool. It aims to ensure that banks do not take on too much risky lending during economic ‘booms’, which could then result in a wave of defaults during economic downturns. DTI restrictions complement other macroprudential tools, such as LVR restrictions, by targeting different aspects of risk.

Are there any exemptions to the DTI rules?

There are some exemptions to the DTI rules. 

  • Kāinga Ora loans.
  • Refinancing a mortgage, where the new loan value doesn’t exceed the original loan value.
  • Portability – this is where you ‘keep’ your home loan when selling, by changing the property securing the mortgage from the old property to the new one. This includes where you move the existing loan to a new bank. The exemption only applies if the value of your new loan doesn’t exceed the value of the original loan for your old property.
  • Bridging finance.
  • Property remediation (for example, leaky home).
  • Construction loans – this applies where you are constructing a new home, are purchasing a newly built home from the developer within 6 months of completion or are purchasing as part of the Government’s KiwiBuild programme.

For a full list of exemptions, see our policy document BS20 below.

Other useful things to know

We may change the DTI thresholds and the speed limits over time, for financial stability reasons.

The DTI rules only apply to bank lending, not non-bank providers.

The full DTI requirements that banks must comply with are set out in our policy document BS20 and any specific conditions of registration that may apply to an individual bank.

Framework for Restrictions on High Debt-To-Income Residential Mortgage Lending (BS20) (PDF, 1MB)

Related information

Traditional houses front in suburb in Auckland New Zealand

DTI examples


We’ve included some simple worked examples, to help you understand how the DTI rules could apply to your borrowing.

Buying your first home

Illustration of a house with a for sale sign

Meet Kenzo and Sachiko

Kenzo and Sachiko are looking to buy their first home together.

They are searching for the perfect property in Tauranga.

The bank will look at Kenzo and Sachiko’s total debt and income to calculate their DTI ratio.

  • Kenzo earns a $70,000 salary (before tax).
  • Sachiko earns a $65,000 salary (before tax).
  • Their gross (before tax) annual income is $135,000.
  • Kenzo has a student loan of $20,000 and an outstanding car loan of $2,000.
  • Sachiko has a credit card with a $5,000 limit. The bank will look at the card limit, not the outstanding balance. 
  • On top of the total existing debt (amounting to $27,000), they want to borrow $800,000 for their first home.

Kenzo and Sachiko's DTI ratio

To work out Kenzo and Sachiko’s DTI ratio, based on the house they're interested in:

Kenzo and Sachiko's DTI ratio equation

This image shows Kenzo and Sachiko's DTI ratio equation of ($27,000 + $800,000) ÷ $135,000 = 6.13.

Under the new DTI rules, a bank can issue up to 20% of its new owner-occupier lending to high-DTI borrowers (with a DTI over 6). Whether Kenzo and Sachiko can borrow this amount depends on how much high-LVR lending their bank has already made, and whether they satisfy the bank’s other lending criteria.

Since Kenzo and Sachiko intend to occupy the property, a DTI threshold of 6 will apply.  

Based on their current income and debt, the maximum they could borrow before they are considered high-DTI is:

6 (DTI threshold) x $135,000 (total income) - $27,000 (total debt) = $783,000 (maximum borrowable amount)

The bank will apply other lending rules and criteria to determine the final amount it is prepared to lend.

Upgrading your home

Illustration of apartments

Meet Johnny

Johnny is moving from Nelson to Wellington for a new job. 

He wants to sell his apartment in Nelson (which is worth $500,000) and buy one in Wellington (which is worth $650,000). 

Johnny plans to use the following amounts to buy the Wellington apartment.

  • Half of the proceeds from the Nelson sale ($250,000). The other half is needed to pay off the Nelson home loan.
  • Johnny’s parents have offered to lend him $50,000 (interest-free). They are happy for the amount to be paid back when Johnny sells the Wellington apartment in the future. 
  • He will need to borrow the remaining $350,000 from the bank. 

He also thinks he’ll need some bridging finance between buying the Wellington apartment and selling the Nelson one.

Johnny earns $95,000 in his new job (before tax). He has no other sources of income. 

Johnny’s total gross income is $95,000.

The $50,000 loan from Johnny’s parents is excluded from the DTI calculation because it is interest-free and doesn’t require repayment until Johnny decides to sell the Wellington apartment.

Johnny will then need to borrow $600,000 to cover the purchase of the Wellington apartment.

However, there is $250,000 of equity in the Nelson apartment, which Johnny will use as a deposit for the Wellington apartment. There is also $250,000 in debt outstanding on the Nelson apartment, which will be repaid as soon as the apartment sells. The Nelson apartment is expected to sell at market value of $500,000. 

Therefore, after buying the Wellington apartment and selling his Nelson apartment, Johnny’s mortgage would be $350,000. 

The $350,000 is included in the DTI calculation, whereas the additional $250,000 is excluded as it would be classified as a bridging loan and repaid once the sale of the Nelson apartment is completed. It is up to each bank to determine if they will allow a bridging loan.

For the purposes of the DTI calculation, Johnny’s total debt is $350,000.

Johnny's DTI ratio

To work out Johnny’s DTI ratio for when he purchases the Wellington apartment:

DTI ratio equation

This image shows Johnny's DTI ratio equation of ($0 + $350,000) ÷ $95,000 = 3.68.

Since Johnny intends to occupy the property, a DTI threshold of 6 will apply. 

Based on his current income and debt, the maximum Johnny could borrow before he is considered high-DTI is:

6 (DTI threshold) x $95,000 (total income) - $0 (total debt) = $570,000 (maximum borrowable amount)

The bank will apply other lending rules and criteria to determine the final amount it is prepared to lend.

Topping up your mortgage

Illustration of a house with a proposed extension

Meet Kate and Johan

Kate and Johan live in Cromwell. They plan to have another child. The house is too small, so they want to extend it and add another room.

While construction loans are exempt from DTI restrictions, the exemption only applies to the construction or purchase of a newly built house – not an extension of an existing house.

Kate and Johan will ask the bank for a top-up on their existing home loan, to finance the house extension.

  • Kate earns $87,000 (before tax).
  • Johan earns $68,000 (before tax).
  • Their total gross (before tax) income is $155,000. 
  • Kate and Johan currently have $325,000 outstanding on their mortgage. 
  • They both have credit cards, with a $5,000 limit each. 
  • They also have an overdraft facility on their joint account, with a $2,000 limit.
  • Their total existing debt is $337,000. They want to top up their home loan by $60,000.

Kate and Johan's DTI ratio

To work out Kate and Johan’s DTI ratio:

DTI ratio equation

This image shows Kate and Johan's DTI ratio equation of ($337,000 + $60,000) ÷ $155,000 = 2.56.

Since Kate and Johan intend to occupy the property, a DTI threshold of 6 will apply. 

Based on their current income and debt, the maximum they could borrow before they are considered high-DTI is:

6 (DTI threshold) x $155,000 (total income) - $337,000 (total debt) = $593,000 (maximum borrowable amount)

The bank will apply other lending rules and criteria to determine the final amount it is prepared to lend.

Buying an investment property

Illustration of townhouses for sale

Meet Priyanka

Priyanka lives in Palmerston North and is looking to buy a rental property in Levin. 

Priyanka owns a business. She pays herself wages which can change year-to-year. The wages have been fairly consistent over the last few years, about $85,000 on average (before tax). 

Since Priyanka is self-employed, the bank will look at her historical income and if it can sustain a mortgage. In this case, the bank has assessed Priyanka’s gross annual income as $85,000.

She expects to rent out the Levin property for $380 a week (gross), which is $19,760 annually. 

Her total income will be assessed at $104,760.

Priyanka owns the home she lives in. There is a mortgage over the home, with an outstanding loan amount of $190,000.

Priyanka has a business loan of $10,000 which is secured over the stock. Business loans are not included in debt when calculating DTI ratios.

Priyanka’s total existing debt will be assessed at $190,000. She wants to borrow $450,000 to buy the Levin rental property.

Priyanka's DTI ratio

To work out Priyanka’s DTI ratio:

DTI ratio equation

This image shows Priyanka's DTI ratio equation of ($190,000 + $450,000) ÷ $104,760 = 6.11.

Since Priyanka is buying an investment property, a DTI threshold of 7 will apply.

Based on her current income and debt, the maximum Priyanka could borrow before she is considered high-DTI is:

7 (DTI threshold) x $104,760 (total income) - $190,000 (total debt) = $543,320 (maximum borrowable amount)

The bank will apply other lending rules and criteria to determine the final amount it is prepared to lend.

Disclaimer

This is general information only. For advice on your specific situation, talk to your bank or seek professional advice.