Banks need to comply with debt-to-income (DTI) restrictions, set by the Reserve Bank. These restrictions apply to new lending for residential homes in New Zealand, for both owner-occupiers and investors.
DTI restrictions came into effect on 1 July 2024. They limit the amount of lending banks can provide to borrowers who already have a large amount of debt relative to their annual gross (before tax) income.
The DTI restrictions are additional to the existing loan-to-value (LVR) restrictions, which set out how much low-deposit lending banks can make. Read our LVR explainer.
Your questions on DTIs answered
The DTI rules allow banks to lend up to:
- 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 are known as ‘speed limits’ which 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 carry out their own affordability assessments. This will influence whether they decide to lend to a prospective borrower or not, and the amount they will ultimately lend.
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.
Borrowing will be considered high-DTI if it exceeds the DTI threshold.
Owner-occupier
Borrowing over 6 x annual gross (before tax) income, minus any debt, is considered high-DTI.
Investment
Borrowing over 7 x annual 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
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.
DTI restrictions are 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.
- Kāinga Ora loans, including First Home Loans.
- Refinancing a mortgage, where the new loan value doesn’t exceed the original loan value.
- Portability – this applies when you shift a loan from one property to another (provided the total value of the loan does not increase).
- Bridging finance.
- Property remediation (e.g. fixing a leaky home).
- Construction loans – this applies when you are constructing a new home or you are purchasing a newly built home from the developer within 6 months of completion.
DTI examples
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.
To work out Kenzo and Sachiko’s DTI ratio, based on the house they're interested in, their DTI ratio equation is ($27,000 + $800,000) ÷ $135,000 = 6.13.
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.
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.
To work out Johnny’s DTI ratio for when he purchases the Wellington apartment, his DTI ratio equation is ($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.
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.
To work out Kate and Johan’s DTI, their DTI ratio equation is ($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.
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.
To work out Priyanka’s DTI ratio, the DTI ratio equation is ($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.