Reserve Bank designs new mortgage lending rule that could be used from next year

Debt-to-income restrictions could operate similarly to loan-to-value ratio restrictions. Photo / Ted Baghurst

The Reserve Bank (RBNZ) has finished designing a new type of mortgage lending restriction, which it could impose on banks from March next year.

The restriction would limit the portion of new mortgage lending banks could issue borrowers seeking a lot of debt compared to their incomes.

If used, debt-to-income (DTI) restrictions would complement loan-to-value ratio (LVR) restrictions, which limit the amount of new lending banks can issue borrowers seeking a lot of debt compared to the size of their deposits.

Like LVR restrictions, DTI restrictions aim to protect the stability of the financial system, and could be adjusted accordingly.

LVR restrictions are currently set at quite a tight level and require most owner-occupiers to have deposits of at least 20 per cent and most investors deposits of at least 40 per cent.

The RBNZ has for several years wanted the Government to empower it to use DTI restrictions. In 2021, when the housing market took off as interest rates plummeted, Finance Minister Grant Robertson finally added DTI restrictions to the RBNZ’s macroprudential toolkit.

After a period of consultation, the RBNZ has arrived at how the new restrictions could look.

The RBNZ would limit the amount of new mortgage lending that could go to borrowers seeking debt worth more than a specified amount of their incomes.

It would give banks some leeway to lend to higher-risk borrowers who don’t meet the threshold.

While the RBNZ previously suggested it would set the same DTI limit for owner-occupiers and investors, it’s now saying these restrictions could be different for the two types of borrowers.

There would also be exemptions, including for those seeking mortgages for new builds.

The RBNZ clarified other technical details, including how personal debt would be treated in DTI calculations, the calculation of business income, and the treatment of complex lending situations.

The RBNZ said the aim of releasing its framework now is for banks to start preparing their systems for when the restrictions may be needed. Banks have indicated they need a year to do this.

Because DTI restrictions would complement LVR restrictions, LVR restrictions may be loosened if DTI restrictions are introduced.

The RBNZ hasn’t said when it might impose the DTI restrictions but said it wouldn’t do so before March 2024.

Having spiked in 2020 and 2021, high-DTI mortgage lending has dropped off. In other words, smaller portions of bank lending are going to high-risk borrowers seeking debt worth more than six or seven times their incomes.

Rising interest rates mean prospective borrowers are having to work harder to prove to banks they can service the debt they’re seeking.

A couple of years ago, a bank had to be sure a borrower could service debt at an interest rate of say 6.5 per cent. Now, they’re being tested at rates of around 8.5 per cent.

So naturally, the portion of new lending to borrowers wanting a lot of debt compared to their incomes has fallen.

The latest available data shows that in December, 39 per cent of new mortgage lending went to borrowers who took out debt worth more than five times their incomes.

This percentage fell for the 13th month in a row and was down from the recent high of 60 per cent in November 2021.

The average borrower also had a higher income in December compared to September, at $146,000 for first-home buyers and $193,000 for other owner-occupiers.