Property investors should consult mortgage advisers on DTI impacts

A property finder is urging investors to consult their mortgage adviser on how debt-to-income (DTI) restrictions, which RBNZ will probably implement about mid-year, will affect their buying power.

“Some investors will need to make their next purchase before mid-year,” Nick Gentle of iFind Property says.

By then banks will probably be able to lend only 20% of their residential loans to investors with a DTI greater than seven times their incomes should DTIs be introduced.

RBNZ deputy governor Christian Hawkesby says the financial stability risks of ‘boom and bust’ credit cycles are significant, so it’s important to ensure banks have appropriate policies in place to manage them. Banks have had since April last year to prepare.

On average the DTI ratio now is between three and four times income. For the average mortgage borrower the restrictions won’t have much effect but 5-10% at the margins won’t be able to get a mortgage. 

CoreLogic chief property economist Kelvin Davidson says given investors are expected to have a greater impact on investors given their risk profiles and tendency for higher DTIs.

“The natural response to the impending system changes could be for investors to bring forward their buying decisions and get into the market ahead of the DTIs, particularly if they already have a substantial portfolio of properties.

“The RBNZ’s modelling suggests that somebody who already has a portfolio in the range of seven to 10 properties and therefore higher existing debt levels, may not be able to secure their next property for a decade after a DTI system has been imposed.

“Similarly, somebody with a small portfolio of one to two properties may not be able to add their next one for at least five years. The bottom line is income needs time to grow to service higher debt levels.”

This in turn could contribute to a floor under current house price falls (for better or worse), alongside other factors such as flattening mortgage rates, rising net migration and LVR loosening.

Alternatively, says Davidson, as no strangers to risk, an increasing number of investors could also look to non-bank lenders to fund their future purchases.

But even if house prices stabilise soon, he doesn’t think they’re about to boom again, not least because DTIs will tend to dampen any future cycles, while mortgage rates are also likely to be ‘higher for longer’ over the next few years too.

The new rules only count if borrowers are buying an existing property. DTIs will not impact mortgage applications for new builds.

Banks will look at debt and income, so if an investor is earning $100,000 in salary and $30,000 in rent, their income will be assessed as $130,000 in any calculation. It is then multiplied by seven.

All debt

Debt includes everything – mortgages, credit cards, personal loans and student loans.

Davidson says high DTI lending has fallen sharply over the past 12-18 months as house prices have fallen, incomes risen, risk tolerance reduced and mortgage rates increased, which has limited debt servicing levels.

For example, in 2021, 35-40% of investor lending was done at a DTI of 7. That had dropped to around 11% by the end of 2022. Last September 31.1% of $5.2 billion of new lending had a DTI of 5 – the lowest since data was collected. In the same month, just 5.2% of mortgage lending was at a DTI of 7, again the lowest since records began. This compared with 9.3% in September 2022 and a record 26.5% in January 2021 – the peak of the property boom.

“This is all to say the early adjustment in LVRs could reflect the substantial decline in the proportion of high DTI lending and all but confirms a change in DTIs is on the cards,” Davidson says.

At a DTI of seven, for somebody earning $100,000 and owing $350,000, in basic terms the rules would allow for an extra $350,000 of new debt - making total debt of $700,000.

An extra $350,000 of debt may not go far in today’s market, Davidson says.

The RBNZ’s 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.

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