DTIs, LVRs – what’s with all the acronyms?
What are DTI and LVR rules and what might the changes mean
Last updated: 5 February 2024
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In late January, the Reserve Bank – which regulates the banks in NZ – announced its intention to put limits on debt to income (DTI) ratios for new mortgage lending from the middle of the year, while at the same time relaxing the loan to value ratio (LVR) rules a little. What are these rules and what might the changes mean?
Starting with LVRs, these have already existed in NZ for around a decade now, and they restrict the size of a mortgage in relation to the value of the property (giving banks some ‘insurance’). At present, up to 15% of owner-occupier loans can be done at less than a 20% deposit (or above an 80% LVR), and up to 5% of investor loans can have less than a 35% deposit (or more than a 65% LVR). The proposal – which is likely to become reality – is that the 15% allowance/speed limit for owner-occupiers will go up to 20%, and the required deposit for investors will come down to 30%.
At present, not even 1% of lending to investors is being done at less than a 35% deposit, either because banks are still very cautious or borrowers are also reluctant to take a loan with only a small deposit, or both. Similarly, only about 8% of lending to owner-occupiers is being done at a low deposit, well below the 15% allowance.
Turning to DTIs, these are intended to insulate borrowers to some degree from possible higher interest rates at some stage in the future, by limiting the size of the mortgage in relation to their income. These have never been implemented in NZ before, at least officially by the Reserve Bank. They’d initially allow up to 20% of owner-occupier loans at DTI greater than six, and to investors at DTI greater than seven. In other words, if your gross household income was $100,000, you can borrow up to $600,000 if you’re an owner-occupier.
Now, in reality, mortgage rates of around 7% (and serviceability test rates roughly 2% higher) are already doing the work of DTIs, by capping how much debt can actually be serviced. As such, if and when official DTI rules are enacted, they may not actually do anything straight away – but they’ll be there for the eventual time when mortgage rates do start to fall more materially again, maybe into 2025. When they do eventually bind, DTIs will tend to tie house prices more closely to incomes over the long run, and also limit how many properties an individual/household can actually own.
It’s also worth noting at this point that new-build properties are exempt from the official LVR rules, and they’ll also be excluded from DTIs. Nor are the two sets of rules going to be applied retrospectively – they only kick in when there’s an application for a new loan or top-up.
So what does all of this mean?
If I’m right and the DTI rules are pretty neutral for the first while, the net impact of the changes on the housing market could be to boost activity a little, due to the loosening of the LVR rules. This could be a further support for first home buyers, who have already been relatively active over the past 12-18 months, but reduced deposits will also help some investors as well. Certainly, when the LVRs were last softened from a 40% deposit down to 35% (1 June last year), there was a subsequent rise in investor lending to those with say a 37% deposit.
Overall, then, with the housing market already showing signs of a recovery – albeit still a bit slow and patchy from month to month and across regions – the proposed changes to bank lending rules from the middle of the year could tend to be a further boost. But the bottom line is that any would-be borrowers still have to be able to service the mortgage, regardless of the size of the loan relative to the property value or household income. And with mortgage rates still at around 7% or even above, satisfying the banks that those payments can be met each month remains the key challenge.