Investor Article

Debt-to-Income Restrictions: What they are and what they mean for Property Investors

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Author: Oliver Pearson

Manager and Property Investor for 20+ years

Jul 10, 2023
Aerial view of Hamilton subdivision

What are Debt-to-Income (DTI) restrictions?


DTI restrictions are a tool used by regulators globally to limit the amount of debt that borrowers can take on, relative to their income.


In New Zealand, the RBNZ is considering introducing DTI restrictions to help reduce the risk of a housing market crash caused by a surge in highly indebted borrowers defaulting on their mortgages.


The RBNZ has not put forward a DTI ratio yet, but it is expected to be between 5 and 7. If they settled on a ratio of 6 then this means that borrowers' total debt should not exceed 6 times their income.



What is counted as income under the rules?


When calculating the DTI ratio, the RBNZ includes all income that a borrower receives from employment, self-employment, investments (including rental income), and any other sources.


The RBNZ may also take into account any expected changes in a borrower's income, such as job loss or retirement. In general, lenders will be required to take a prudent approach when assessing a borrower's income and expenses, taking into account factors such as the borrower's ability to meet their ongoing expenses and the risks associated with the loan.



When are DTI restrictions likely to be introduced?


The RBNZ is not in a huge rush to bring the rules in, given the current soft nature of the property market.


They have signaled that we are likely 12 months away from their introduction.



Are there any exemptions that might apply to Property Investors?



Construction loans will likely be exempt so if you are borrowing to build an investment property then that loan could be exempt from DTI rules.


Similarly, a loan used to purchase a ‘new build’ would likely be exempt.



What impact will DTI restrictions have on Property Investors?


If you look at the below chart published by the RBNZ, you can see that Investors typically have higher DTI ratios than other buyer types, so we can expect that investors will feel the impact of DTI restrictions more than most.



DTI ratios by borrower type (as a percentage of lending by borrower type) Source: RBNZ


One potential negative impact, highlighted by the New Zealand Property Investors Federation, from DTI restrictions is rising rents due to a smaller supply of rental properties.



It is worth noting that these rules are currently proposed, and may be subject to change depending on the outcome of the consultation process.


However, they provide some indication of the RBNZ's thinking on the issue of DTI restrictions, and suggest that the rules are likely to be nuanced and targeted to ensure that they do not have unintended consequences.


Click here to read the RBNZ's findings and proposals, in their entiriety.


Image of Oliver Pearson

Oliver Pearson

Manager and Property Investor for 20+ years

Image of Oliver Pearson

Oliver Pearson

Manager and Property Investor for 20+ years

Oliver Pearson began investing in property aged 21 and has since bought, developed and sold real estate in the UK, USA, South East Asia and New Zealand. After a career in banking he is now on the management team at Waikato Real Estate and has contributed to property articles for NZ Herald, Stuff and Property Investor Magazine.

Based in Raglan, Oliver's passions extend beyond property to surfing, hydrofoiling, and providing a taxi service for his children.

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