Analysis: The Reserve Bank is looking to revamp its rules for retail bank mortgage lending. 1News reporter Katie Bradford breaks down what this means.
The Reserve Bank has begun consulting on introducing debt to income restrictions (DTIs) and loosening loan to value ratios (LVRs) for residential lending.
It sounds like a jumble of letters — DTIs and LVRs — but they are actually an important tool the Reserve Bank can use to protect homeowners and banks.
So, what is the deal with DTIs?
Essentially, the lower your DTI, the more likely you would be able to access a home loan.
The Reserve Bank has come up with a proposal that would see banks only able to hand out 20% of their mortgages to owner occupiers with a DTI greater than six.
That means the maximum loan available to an applicant would be six times their yearly income. If you earned $150,000 a year, for example, you would be able to borrow up to $900,000. Or if you earned $60,000, you could borrow up to $360,000.
But it won’t just be owner occupiers who would be affected. Banks would only be able to hand out 20% of their residential loans to investors with a DTI greater than seven.
The central bank’s own figures in September 2023 showed about $1.6 billion of the $5.2 billion of new mortgages in the past few months had been to DTIs above five — so it’s not a huge issue right now.
Defaults on mortgages have yet to become a big problem, and if interest rates do start coming down later this year, that will relieve pressure.
Why look at introducing DTIs?
The Reserve Bank has been warning for the past year or so that the combination of higher interest rates, a cost of living crisis and falling house prices could lead to an increasing number of people coming under intense mortgage stress.
That is one of the reasons the Reserve Bank has been wanting to introduce DTIs for some time.
The DTIs would work alongside LVRs — loan to value restrictions — which limit a loan amount to a percentage of the value of the home. LVRs were first introduced during the housing boom of 2013 and have been stopped and started ever since.
The proposed changes are all aimed at protecting banks and consumers in the event of a sharp correction in house prices.
We’ve seen that gradual slide in house prices and now a slight pick-up. But the boom/bust cycle of Aotearoa’s housing market means the Reserve Bank wants to be able to grab this tool when it needs to.