BNZ first bank to introduce DTIs

BNZ has announced sweeping new restrictions on borrowing.

It is limiting the amount of money people can borrow under a debt to income ratio, or DTI.

This is being set at six times the amount of money that is earned by a borrower.

The bank explained its actions by saying it is a responsible lender and takes its obligations seriously. 

It is are making these changes to mortgages that are gained via a mortgage broker in the first place.     The bank is however looking at how to extend this policy to 'walk in' mortgages as well.  

It adds a less formalised version of DTI has long been applied to all loans anyway, since all banks look at  borrowers' earnings when assessing their ability to make interest payments.

It adds it is looking at the overall level of debt its customers take on to ensure they are in a secure position with rising interest rates.

This action comes as long term rates have already risen and look certain to rise further as historic low interest rates fade away world wide.

The move has been described as a case of beating the Reserve Bank to the punch by a broker, Bruce Patten of Loan Market.

He says the RBNZ had already obtained the right to set DTIs as one of its weapons in the fight against inflation and especially house prices.

But it has not yet used this tool, and Patten says the BNZ is trying to set the number of six as a kind of going rate, in the hope that it becomes the generally accepted figure, and is the one the RBNZ finally settles on.

The alternative would have been to do nothing and wait for the Reserve Bank to move, and perhaps be stuck with a lower number such as five.  

Patten added the figure of six was one which the banking system could live with but would be especially hard on first time home buyers.

Many of these were low income earners who could buy very little under a DTI of six.    But they were generally young, and would earn more as they get promoted in their career, so were of no real risk to the banking system. 

Paradoxically, Patten said the DTI would also hit wealthy people with large property portfolios, but leave middle income people such as Mum and Dad inverstors with a single rental property relatively unscathed.

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