28 May 2024

RBNZ pulls trigger on new bank lending limits

11:49 am on 28 May 2024
Housing in Mount Victoria, Wellington.

Housing in Mount Victoria, Wellington. Photo: RNZ / Dom Thomas

The Reserve Bank (RBNZ) has activated debt to income (DTI) rules as a further means of managing the property sector.

The DTIs, which limit the amount that can be borrowed in relation to income, have been well signalled as another protection against financial risks raised by a booming property market and high household debt.

From 1 July banks will be limited to no more than 20 percent of new lending to owner-occupiers with a DTI ratio of more than 6, and no more than 20 percent of new investor lending over a DTI of 7.

That means most owner-occupiers with an income of $100,000 would be able to borrow $600,000, and investors $700,000.

At the same time the RBNZ is loosening the loan to value ratios (LVR) which have restricted the amount of low deposit lending by banks.

Deputy Governor Christian Hawkesby said the two measures were complementary and would reduce risks to the financial system.

"LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn. While DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt.

"Both act as guardrails reducing the build-up of high-risk lending in the system."

The revised LVR limits will be eased to allow a greater number of low deposit borrowers.

Hawkesby said the limits had been designed to give banks flexibility to use discretion and manage complex cases.

A just released report from property research firm CoreLogic said debt to income ratios would in time become a significant factor in the market over time as mortgage rates fall by slowing the rate at which property investors can grow a portfolio, especially in more expensive areas.