RBNZ pushes go button on DTI restrictions

Debt-to-income (DTI) restrictions and loosening of loan-to-value ratios (LVR) will be introduced by the Reserve Bank on July 1.

Banks will need to comply with the new restrictions from that date.

The DTI restrictions will allow banks to make 20% of new owner-occupier lending to borrowers with a DTI ratio over 6 and 20% of new investor lending to borrowers with a DTI ratio over 7.

LVRs will be eased to allow banks to make 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%.

DTI restrictions create limits on the amount of high-DTI lending banks can make (i.e. where the borrower has taken on a high amount of debt relative to their gross or pre-tax income).

The restrictions include an allowance for banks to do 20% of their lending outside of the Reserve Bank’s specified limits. “This will improve efficiency by letting banks exercise their own discretion and manage complex cases,” Christian Hawkesby, Reserve Bank deputy, says.

“ DTIs and LVRs are complementary. LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn. While DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt. Both act as guardrails reducing the build-up of high-risk lending in the system.

“Having both the DTI and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system. Therefore, activating DTIs means that we can ease LVR settings too.”

DTI and LVR restrictions are macroprudential policy tools. These are regulatory measures implemented by central banks and financial authorities to mitigate systemic risks and promote the stability of the financial system as a whole.

Macroprudential policy aims to reduce the likelihood of a financial crisis by restraining excessive lending during booms and making banks and households more resilient during busts.

It focuses on risks to the financial system as a whole and complements our baseline prudential policies, which apply to individual banks.

Banks were given 12 months to prepare their systems for the possible implementation of DTI restrictions.

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