RBNZ Debt-to-Income restrictions activated

29 May 2024

The Reserve Bank of New Zealand – Te Pūtea Matua has announced that banks will need to comply with Debt-to-Income (DTI) restrictions from 1 July 2024.  At the same time, Loan-to-Value Ratio (LVR) restrictions will be loosened. 

The announcement follows various consultations on the merits, design and framework of debt serviceability restrictions, with the most recent consultation on activating DTI restrictions and loosening LVRs published in January this year.

The DTI restrictions set limits on the amount of debt borrowers can take on relative to their income, with a view to reducing the probability of defaults. The LVR restriction is aimed at reducing potential losses when defaults do occur. Together, the restrictions limit how much high-DTI and low-deposit residential lending banks can do, with the aim of reducing the accumulation of high-risk lending in New Zealand’s banking sector.

The rules apply to new residential lending in New Zealand, including both owner-occupier and investor lending, from 1 July 2024.

The DTI settings will allow banks to make:

  • 20% of new owner-occupier lending to borrowers with a DTI ratio over six; and
  • 20% of new investor lending to borrowers with a DTI ratio over seven.

However, there is an allowance for banks to do 20% of their lending outside the specified limits.

The LVR settings will be eased to allow banks to make:

  • 20% of owner-occupier lending to borrowers with an LVR greater than 80% (currently set at 15%); and
  • 5% of investor lending to borrowers with an LVR greater than 70% (currently set at 5% where the LVR is greater than 65%).

A framework published in April 2023 outlines the definition and procedures for activating the DTI restrictions. To ensure a smooth introduction of the rules, banks will have six months to calculate whether their lending is compliant.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.