New Zealand sets new debt-to-income restrictions in lending

It reduces the amount of high-DTI loans that local banks can lend out.

The Reserve Bank of New Zealand - Te Pūtea Matua has activated debt-to-income (DTI) restrictions and loosened loan-to-value ratio (LVR) restrictions, limiting the amount of high-DTI lending and low-deposit lending that banks in New Zealand can make.

A high-DTI loan is when a borrower has taken on a high amount of debt relative to their gross or pre-tax income. 

The new DTI restrictions include an allowance for banks to do 20% of their lending outside of the central bank’s specified limits. Specifically, it allows banks to make 20% of new owner-occupier lending to borrowers with a DTI ratio over 6; and 20% of new investor lending to borrowers with a DTI ratio over 7.

Meanwhile, the LVRs will be eased to allow banks to make 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and 5% of investor lending to borrowers with an LVR greater than 70%.

Banks are required to comply with the new DTI and LVR restrictions beginning 1 July 2024.

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The restrictions apply to new lending for residential properties in New Zealand, for both owner-occupiers and investors.

Banks in New Zealand are also given 12 months to prepare their systems for the possible implementation of DTI restrictions.

In a statement posted on the central bank’s website, Deputy Governor Christian Hawkesby says that the move is complementary.

“Having both the DTI and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system. Therefore, activating DTIs means that we can ease LVR settings too,” Hawkesby stated.

The new restrictions come after a consultation by the RBNZ on the settings launched from January to March 2024.