The big debate: will the new DTI policy really affect the mortgage on your next home?

Lately, it feels as though banks announce major news every Thursday. In last week’s article, YIJU had only just reported that New Zealand’s major banks had recently raised their fixed mortgage rates when Westpac announced another increase that very evening—its third substantial rate rise in two weeks! Its one-year fixed rate, for example, rose from 2.55% p.a. to 3.34% p.a., an increase of 31%. What a rollercoaster ride! Yet this was not the biggest move a bank made that day.

Although BNZ, one of New Zealand’s big four banks, made no official announcement, it emailed mortgage advisers outlining a new debt-to-income (DTI) policy. This means BNZ’s lending-to-income ratio must now be no higher than 6:1. When the news emerged, it caused an uproar in the property sector—another property-related bombshell following several major government policy announcements.

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YIJU first looks at some key questions about DTI:

 

01

What is the debt-to-income ratio (DTI)?

Your debt-to-income ratio is your total debt divided by your total gross income, before tax. Essentially, DTI takes all your debts into account to ensure you can repay existing and future liabilities. For example, consider a middle-income New Zealand household where each partner earns NZ$60,000 gross annually, for a combined NZ$120,000. They want to borrow NZ$500,000. Their debts comprise a new mortgage of NZ$500,000 and a credit card with a NZ$2000 limit. Total debt: $502,000. Apply the formula: $502000 ÷ $120000 = 4.18 DTI. This means total debt is 4.18 times total income.

 

02

BNZ’s new DTI policy: when does it take effect, and have other banks followed suit?

The email states that BNZ’s new DTI policy takes effect on 28 October 2021 at 5h in the afternoon. YIJU understands that ASB has long applied a maximum DTI lending limit of 7:1. No other banks have followed suit so far. In fact, as early as August this year, the Labour government and the Reserve Bank of New Zealand agreed to continue advancing DTI lending restrictions to further stabilise house prices and make homes affordable for more first-home buyers.

What far-reaching effects might banks’ new DTI policies have on investors and the property sector? YIJU spoke with experienced mortgage adviser Annie Tsai of Top Mortgage for an in-depth explanation.

 

Annie Tsai

Top Mortgage Managing Director 

 

Q1: BNZ’s DTI policy requires a lending-to-income ratio no higher than 6:1. How different is this from the ratios used in practice today? How do you interpret its impact on the property market?

Annie：Although discussions about DTI began in our financial industry last year, BNZ’s move still shocked many of us. It arrived without warning and imposes a very strict blanket rule: if your borrowing exceeds the ratio, the bank will refuse even to process your application. A local bank began applying a 7:1 policy internally last year, but it never publicly stated that applications exceeding that ratio would be rejected outright. Instead, they needed head-office approval and were often ultimately approved if the income was sufficient.

I believe it will affect both low-income first-home buyers and investors, with the extent depending on each person’s financial situation. This is particularly true for investment in relatively expensive areas such as Auckland, Wellington, Queenstown and Tauranga, where average house prices have exceeded a million dollars. Let me give a simple example:

Suppose a property investor with no other debt buys a three-bedroom house. Under current lending policy, the bank allows two tenants, so assume:

Each tenant pays $150 a week in rent, and the investor earns an annual salary of NZ$100,000;

Their total income is $150 × 2 tenants × 52 weeks + an annual salary of $100,000 = $115,600.

Before the DTI policy, they could essentially borrow up to NZ$900,000 from the bank. Under the new 6:1 policy, $115,600 × 6 = $693,600. That is a loan of less than NZ$700,000, a reduction of nearly NZ$200,000.

This suggests things will become harder for first-home buyers. For example, an ordinary working couple in New Zealand with a combined annual salary of $120,000 can multiply that by 6 to borrow only a little over $700,000. Without a sufficient deposit, entering the market will be difficult.

The impact will be greater for many highly leveraged investors, such as those who already own several investment properties. Another policy change today affects rental income: banks previously counted 80% of rental income, but that has now changed to 70%, reducing assessed total income accordingly. The recent cycle of rapid mortgage rate increases across the major banks will make servicing debt even harder for these investors.

 

Q2: Do you think the other banks will follow suit, or is this an independent move by BNZ?

Annie：Although only BNZ has introduced this policy so far, with no other banks following suit, my experience of more than a decade in the industry suggests the big four banks usually move very much in step. Other banks may soon introduce similar lending restrictions to achieve the same effect.

 

Q3: How should investors respond to DTI and other policies tightening bank lending?

Annie：My advice is to maintain good communication with your mortgage adviser or bank lending manager. When mortgage rates are rising, lock in the lowest rate you can as early as possible. For customers with substantial borrowing, a reduction of one or two percentage points a year can save tens of thousands of New Zealand dollars in interest. If you decide to borrow to buy another investment property, try to choose one with strong capital growth potential and keep a close eye on cash flow. Although the pandemic makes it harder, increasing rental yields on existing investment properties and raising personal or household income are also very important. Given differences in banks’ lending policies and the timing of tighter restrictions, we generally also help customers use a combination of loans from different banks to manage risk effectively. Anyone with questions about borrowing is welcome to contact me for highly professional mortgage, investment and financial advice.

 

Annie Tsai Contact details 

Email：annie@topm.co.nz

Phone：021341213