Reserve Bank’s proposed debt-to-income restrictions unlikely to have much bite, for now

The Reserve Bank (RBNZ) has hinted new mortgage lending rules it might impose on banks next year are unlikely to be too restrictive.

In April, the RBNZ gave banks a year to ready their systems for the possible introduction of debt-to-income (DTI) restrictions.

These limit the portion of new mortgages banks can issue borrowers seeking relatively large amounts of debt compared to their incomes.

The rules basically see the RBNZ tell banks, “No more than x per cent of your new lending can go to borrowers wanting debt worth x times their incomes.”

Speaking to the Herald, RBNZ deputy governor Christian Hawkesby wouldn’t say when the RBNZ would implement the restrictions, which former finance minister Grant Robertson empowered it to impose to protect the stability of the financial system.

Nor would he specify the DTI ratio above which lending would be limited.

However, he said the RBNZ wasn’t keen to adjust DTI restrictions as frequently as it adjusts loan-to-value ratio (LVR) restrictions, which limit bank lending to borrowers with relatively small deposits.

So, a set restriction would have less bite in the current high interest rate environment, where people can’t afford to take out large mortgages compared to their incomes anyway, than it would in a low interest rate environment.

For example, someone who earned $100,000 a year would struggle to convince their bank they could repay a 30-year mortgage worth seven times their income ($700,000) at a fixed interest rate of 7 per cent, as their weekly repayments would total $1074.

But they may have had more luck a few years ago, when mortgage rates were only 3 per cent, as their repayments would have been $681.

Hawkesby said DTI restrictions have a “natural stabilising tendency”.

“At the moment, DTI is more subdued because of the environment we’re in. That won’t always be the case,” he said.

Indeed, in September, 5 per cent of banks’ new mortgage lending went to borrowers taking out mortgages worth more than seven times their annual incomes.

This was the lowest percentage since the RBNZ started collecting this data in 2017.

However, when interest rates were very low and the property market was red hot in January 2021, 27 per cent of banks’ new commitments went to borrowers with DTI ratios above seven.

Hawkesby said one of the benefits of DTI restrictions is that they can be put on at a time they wouldn’t be very restrictive.

But if the market turned and demand for riskier mortgages picked up, they would provide a “natural constraint”.

Once again, Hawkesby spoke in general terms and didn’t say when the RBNZ would implement the rules or what they would look like.

In April, the RBNZ said it could set DTI restrictions at different levels for owner-occupiers and investors. It does this with its LVR restrictions, which are tougher for investors.

It could also make exemptions, including for those seeking mortgages for new builds.

Because DTI restrictions would complement LVR restrictions, LVR restrictions could be loosened if DTI restrictions were introduced.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.