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News

Consultation on DTI and LVR settings

The Reserve Bank of New Zealand - Te Pūtea Matua has launched a consultation on activating debt to income (DTI) restrictions and loosening loan to value ratios (LVR) for residential lending.

Published:

Deputy Governor Christian Hawkesby says the financial stability risks of ‘boom and bust’ credit cycles are significant, so it’s important to ensure we have appropriate policies in place to manage them. 

“DTI restrictions, which set limits on the amount of debt borrowers can take on relative to their income, will complement other tools we use to support financial stability, including LVR restrictions on residential mortgage lending,” Mr Hawkesby says.

“While the LVR tool is aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage, the DTI tool is aimed at reducing the probability of a systemic wave of households defaulting. We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies. 

“Introducing DTI restrictions will also allow us to loosen LVR settings without increasing risks to financial stability. Working together, these tools enable us to more efficiently target financial stability risks.”

We propose initially setting the DTI policy to allow banks to lend:

  • 20% of their residential loans to owner-occupiers with a DTI greater than 6; and
  • 20% of their residential loans to investors with a DTI greater than 7.

We are proposing easing the LVR settings at the same time as activating DTIs. We propose easing LVRs 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%.

Background

  • In November 2021 we consulted on the merits and design of debt serviceability restrictions, including DTIs.
  • In 2022, we held a public consultation on the framework for the DTI restrictions. After incorporating feedback from stakeholders, we published the framework document for DTI restrictions in April 2023. The framework document outlined the definition and procedures under which the DTI restrictions would be activated.
  • We are now consulting on the proposed settings for DTI, as well as proposed easing of LVRs. Consultation will close on 12 March 2024. We will then consider the feedback and decide on the activation and initial settings of the DTI tool. We expect to communicate our decisions in the middle of this year.

More information

Enhancing the efficiency of macroprudential policy: activating DTIs and loosening LVRs consultation

Loan-to-value ratio restrictions

Questions and answers

A Debt-to-income ratio (DTI) equals a household’s total debt divided by the household’s total gross income. The DTI restrictions will restrict the share of residential lending that banks can make to households with high-DTI ratios. The restrictions will only apply to new residential lending. Previously approved loans will not be affected by the restrictions unless the loan is “topped up”.
In housing booms, the share of lending going to households with high DTI ratios often increases. At these times, financial stability risks build up, as these households are more likely to enter financial stress than households with lower DTI ratios if financial conditions change (such as increases in interest rates or other household costs).

By restricting the share of high-DTI lending, we aim to limit the build-up of systemic financial risk, so that New Zealanders can be confident in the stability of their financial system. While limiting the build-up of systemic financial risk, we also aim to minimise the efficiency costs associated with doing so. These efficiency costs occur when otherwise creditworthy households are restricted in their borrowing.

Like the LVR restrictions, we propose setting a ‘threshold’ and a ‘speed limit’ for the DTI restrictions. The ‘threshold’ is a specified DTI ratio, above which, banks are restricted in their lending. The ‘speed limit’ is the allowable share of lending that banks can do above the threshold. 

We propose setting the DTI tool such that in more normal times it only minimally restricts residential lending, but that, without adjustment, it will restrict high-DTI lending in booms. In this way, it will act as a guardrail against risky lending, while also minimising the efficiency costs in more normal periods.

Speed limits allow a percentage of lending to be above the proposed DTI thresholds. Financial stability does not generally require that no lending is done above the threshold, only that there is not ‘too much’. By allowing some lending above the threshold we help minimise potential efficiency costs by giving banks discretion to offer loans to creditworthy households or for complex cases whose DTI cannot easily be determined.

DTI restrictions limit the amount of total debt households can take on as a multiple of their income. Loan-to-Value ratio (LVR) restrictions limit the size of the mortgage households can take out, relative to the value of the property they are buying (essentially it requires a minimum deposit). LVRs are aimed at the risk to the financial system that households will not be able to fully repay their loan if they default on their mortgage. DTIs reduce the risk of households defaulting on their mortgage or being forced to sell their house.

Having both policies activated will enhance the efficiency of our macroprudential policies, as they can target the two risks individually. With the two restrictions in place, we will be able to set them slightly more loosely than with only one of them in place. Therefore, the efficiency costs of limiting lending to otherwise creditworthy borrowers will be reduced.

The proposed DTI settings are that:

Banks cannot lend more than 20% of their owner-occupier lending to households with a DTI greater than 6, and cannot lend more than 20% of their investor lending to households with a DTI greater than 7.

We are further proposing to ease LVR settings such that:

Banks cannot lend more than 20% of their owner-occupier lending to households with an LVR greater than 80, and cannot lend more than 5% of their investor lending to households with a LVR greater than 70.

Data indicates that first-home buyers tend to borrow at lower DTI ratios than other owner-occupiers or investors. Therefore, the DTI restrictions will likely have less impact on them than other borrowers. Additionally, because we will be able to set LVR restrictions a little more loosely when DTIs are in place, first-home buyers might have more access to the market, as saving a deposit is often the bigger barrier for them.
Owner-occupiers tend to borrow at lower DTI ratios than investors. Also, as interest rates increase, owner-occupiers tend to experience financial stress at lower DTIs than investors. Therefore, to reduce the systemic financial risk associated with high-DTI lending to owner-occupiers, we need to set the threshold lower for them than investors.
If, following the consultation, we decide to proceed with activating the DTI restrictions, we intend activating them in the middle of 2024. At that time, the housing market is not expected to be in a period of strong growth, and so, at the proposed settings, the DTI restrictions are unlikely to significantly restrict lending when they first come in. We are proposing activating the tool now so that, when the housing market next enters a boom phase, the DTI restrictions will be in place to act as a guardrail against the build-up of high-DTI lending.
The DTI restrictions will cover most residential lending. Nonetheless, there will be some exemptions, similar to the exemptions for the LVR tool. The main exemptions will be for newly constructed dwellings and Kāinga Ora loans. Therefore, they will not restrict the supply of new housing, nor Kāinga Ora loans for low-income households. DTI restrictions will also not apply to business loans or loans for commercial property.

Media contact

Donna Freebairn
Senior Adviser, External Stakeholders
Mobile: +64 20 41 664411
Email: [email protected]