Understanding New DTI Rules in New Zealand: What Home Buyers and Investors Need to Know

Debt to Income RatioStarting July 1st, 2024, significant changes are coming to the New Zealand property market. The Reserve Bank of New Zealand (RBNZ) is introducing new Debt-to-Income (DTI) rules that will affect how much you can borrow to buy residential property. These changes are designed to ensure the stability of the housing market and to help prevent borrowers from taking on too much debt. Here’s a closer look at what these new DTI rules mean for you.

What Are the New DTI Rules?

The DTI rules set a limit on the amount you can borrow based on a multiple of your income. This multiple varies depending on the purpose of your property purchase:

      • Owner-Occupiers: You can borrow up to 6 times your income.

      • Property Investors: You can borrow up to 7 times your income.

    These limits are part of a broader strategy by the RBNZ to maintain financial stability.  The RBNZ is trying to avoid the kind of runaway house price inflation that can lead to economic bubbles.

    Why Are These Rules Being Introduced?

    The introduction of DTI limits is aimed at achieving several key objectives:

        1. Prevent Over-Borrowing: The RBNZ caps borrowing based on income to prevent people from taking on too much debt, especially if interest rates go up.

        1. Stabilise House Prices: During housing booms, unrestricted borrowing can lead to rapid increases in house prices. The DTI limits are intended to cool down the market by restricting borrowing capacity.

        1. Ensure Financial Stability: These rules aim to protect the financial system by preventing excessive borrowing and avoiding widespread loan defaults.

      How Will These Changes Impact Owner-Occupiers?

      The new DTI rules will likely have little impact in the short term for homebuyers.  With the new DTI limits, most borrowers will not see a significant change in their ability to secure a mortgage.

      However, banks may be stricter about verifying income, so borrowers must clearly document their earnings. Overall, the transition should be relatively smooth for most owner-occupiers.

      How Will These Changes Impact Property Investors?

      Property investors will feel the effects of the new DTI rules more acutely. With a cap of 7 times income, many investors will find it harder to leverage their properties. This is particularly true for larger-scale investors who rely heavily on rental income to service their loans.

      In the short term, high interest rates are already making borrowing challenging. But as interest rates eventually fall, the DTI limits will continue to restrict borrowing, even during more stable market conditions. Investors will need to be more strategic and may have to look at alternative financing options or adjust their investment strategies.

      Planning Ahead

      With these new rules, it’s crucial for both home buyers and property investors to plan ahead. Here are a few tips to help navigate the changes:

          • Review Your Finances: Take a close look at your income and expenses to understand how the DTI limits will affect your borrowing capacity.

          • Document Your Income: Ensure all sources of income are well-documented and verifiable to meet stricter bank requirements.

          • Consider Alternative Financing: For property investors, explore non-bank lending options or other creative financing solutions that may not be subject to the same DTI limits.

          • Seek Professional Advice: Consulting with mortgage advisers and financial experts can provide valuable insights and help you make informed decisions.

        Final Thoughts

        The new DTI rules mark a significant shift in New Zealand’s housing market. While they may pose challenges, especially for property investors, they are also a step towards a more stable and sustainable market. By understanding these changes and planning ahead, you can make better financial decisions.

        If you have any questions or need expert advice on how these changes could impact you, don’t hesitate to reach out to Andre Stokes your mortgage adviser. He’s here to help you through this transition and ensure you’re well-prepared for the future.