RBNZ gives details of new lending rules

The Reserve Bank has reveled its proposed debt-to-income (DTI) restrictions alongside plans to loosen loan to value ratios (LVR) for residential lending.

DTI restrictions will limit the amount borrowers can take out relative to their income. For example in the UK it is 4.5 times income for a mortgage.

The RBNZ proposes initially setting the DTI policy to allow banks to lend:

  • 20% of their residential loans to owner-occupiers with a DTI greater than 6; and
  • 20% of their residential loans to investors with a DTI greater than 7.

It is proposing easing the LVR settings at the same time as activating DTIs to allow:

  • 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and
  • 5% of investor lending to borrowers with an LVR greater than 70%.

RBNZ deputy governor Christian Hawkesby says introducing DTI restrictions will allow the bank to loosen LVR settings without increasing risks to financial stability. “Working together, these tools enable us to more efficiently target financial stability risks.”
He says the financial stability risks of ‘boom and bust’ credit cycles are significant, so it’s important to ensure the bank has appropriate policies in place to manage them.

“While the LVR tool is aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage, the DTI tool is aimed at reducing the probability of a systemic wave of households defaulting. We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies,” Hawkesby says.

Possible DTI restrictions have been in the pipeline since 2021 when the RBNZ consulted on the merits and design of debt serviceability restrictions, including DTIs.

In 2022, it held a public consultation on the framework for the DTI restrictions. After incorporating feedback from stakeholders, it published the framework document for DTI restrictions in April last year. The framework document outlined the definition and procedures under which the DTI restrictions would be activated.

The latest round of consultation will close on 12 March/ Hawkesby says the RBNZ will then consider the feedback and decide on the activation and initial settings of the DTI tool. It expects to let the public know its decisions in the middle of this year.

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