Mortgage group writes to Finance Minister about DTIs

In her letter to the minister Campbell says the LVR restrictions introduced earlier by the Reserve Bank are working and need more time to bed in. 

"It is more difficult to get a mortgage right now, than at anytime in the last 10 years – except for during the GFC," she says.

"Banks have tightened their lending criteria enormously, and this tightening is actually far harsher than the Reserve Bank rules.  This tightening phase has already made borrowing very difficult for First Home Buyers, as lenders are ‘cherry picking’ only the premium customers (i.e. graduates/professionals), for these rationed loans.  Even with the Welcome Home Loans, lenders are subjecting potential borrowers to very onerous income servicing calculation, so it is incredibly difficult to access this product."

The Reserve Bank Governor Graeme Wheeler says, in the recently released Financial Stability Report, that he is concerned about affordability of loans in a rising rate environment. 

Campbell says banks are already factoring this into their servicing calculations. "Most lenders stress-test their clients loan applications at an interest servicing rate of around 7.5-7.75%, and this stress test rate rises faster than interest rates.  Lenders take the new Code of Responsible Lending very seriously, and will not let borrowers take on loans that they are unlikely to be able to manage in the long term.  It is now no longer possible to get interest-only terms on owner-occupied properties, unless it is for a specific purpose, and for a short period of time. Large Lines of Credit are also now almost impossible to source, with lenders requiring a full proposal of the purpose of these loans."

"As an industry, we think the banks voluntary tightening shows that the lenders are prudent, and have proven that they can be responsible in a heated market, without further regulatory interference from the Reserve Bank."

"While we are comfortable with the LVR levers, debt to income ratios are a step too far."

Unintended consequences

Campbell says the main concern around DTIs are the ‘unintended consequences’ and such a regime could end up hurting the borrowers who require the most help   Examples she quotes include First Home Buyers who have to borrow at high multiples of their income, but whose income is likely to rise over time, and have the flexibility to get in flatmates or students, should servicing become an issue. 

Self Employed/small business owners  - will also be adversely effected.  Many of these people use the equity in their own homes as working capital for their businesses as it is the easiest, and cheapest way to initially  fund a small business. 

"These borrowers, who may have a modest start-up income, or tax efficient financial statements, will find it very difficult to access any capital in this way."

Older borrowers, or borrowers on fixed or low incomes, will find it almost impossible to access any of their equity in their home, she says. " This may mean delaying or avoiding medical care, or basic home repairs.  These borrowers may have free-hold million dollar properties, and be unable to access these funds, unless they take out a Reverse Mortgage (which is not possible unless you are at retirement age)."

DTIs in effect ‘lock up’ equity, she says.  "A free flow of capital countered with responsible lending practices are a crucial factor in a thriving economy.  DTIs are an extremely blunt tool – and a tool that will only work in favour of borrowers with high incomes.  Regulation should be fair, and ordinary New Zealanders deserve the opportunity to decide themselves when to become home-owners."

The Mortgage Supply Co and NZ Mortgage Advisers has 70 mortgage advisers across New Zealanders.

The Reserve Bank has asked the minister to let if have  the ability to introduce debt-to-income ratios if required. English has not made a decision yet, however he is reported as saying DTI restrictions are "tricky to implement" and he has asked the central bank for more information.

"The bank has indicated even if it had them there's a lot of work in getting the implementation right," Mr English said. "I wouldn't want to speculate on how long we'd take but they're tricky to implement, that's the advice we've got.