RBNZ to press on with DTIs

The Reserve Bank plans to press ahead and design one of two proposed income-based controls on home lending.

it is working on a Debt to Income (DTI) ratio which would restrict the size of loans.

It would require all loans to be measured against a borrower's income, and the size of a loan would not be permitted to exceed a designated multiple of that income.

This is one of two proposed measures collectively known as Debt Serviceability Restrictions (DSRs). It would work in addition to established loan-control measures like Loan to Value (LVR) restrictions.

The RBNZ announced last year it was consulting on DSRs and received submissions from across the industry.

The bank has now assessed those viewpoints.

“Following consideration of the submissions, we intend to proceed with designing a framework for operationalising DTI restrictions,” the deputy governor and general manager of financial stability, Christian Hawkesby said.

“Our modelling indicates that first-home buyers would be the least impacted by a DTI restriction, with investors impacted the most as they tend to borrow at higher DTIs than other groups on average.”

Hawkesby said this aligned with a Memorandum of Understanding with the Minister of Finance, which sought to avoid negative impacts on first-home buyers.

There will be further consultation but the framework is intended to be complete by the end of this year and be in force by mid-2023 if required.

But the RBNZ said it would not go ahead at this stage with a second measure that would have put a 'floor' under stress testing levels, or serviceability levels, for bank loans.

This would have stopped the stress testing level from being lowered in cases where banks thought a borrower could still pay the loan because of other buffers like high personal savings.

However this was probably not needed.

“Banks’ test interest rates have begun to rise in line with market rates, and we expect to see a slowdown in high-DTI lending over the coming months,” the RBNZ said.

“The new CCCFA regulations, changes to the tax treatment of investment property, and tighter LVR restrictions on owner-occupiers are also having an impact on the availability of mortgage credit.

“We therefore do not see an urgent need to impose an interim test rate floor at this stage.

“But we are monitoring the situation closely and do not rule out this option if there is a resurgence of risky lending in the housing market.”

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