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DTI… Because We All Needed Another Three Letter Acronym

14th Jun 2024 | Jay Stothers


First things first, I’m expecting everyone to know by now (and if not, you can pretend you did, I won't tell anyone), but this one stands for Debt to Income, and is the ratio of the amount of money you can borrow, in relation to the amount of money you earn.

Now I know what you’re thinking… surely that’s always been the case? People who earn more can borrow more, and vice versa? Right? Well, yes, but it’s never been calculated in such a black and white way, nor has it been a rule from the Reserve Bank of New Zealand (RBNZ… four letters that one) that the banks had to follow. Previously, RBNZ were mostly happy to leave income calculations and bank policy down to the banks themselves, leaving the decision of who can pay back how much down to the bank lending said “much”. But alas… no more, and it makes sense, the RBNZ has rules for most other aspects of banking and they are there to keep the industry in check and avoid the disasters of the past.

But that is where all of the headlines on DTI (Debt to Income) I think are leading people astray a bit. I would class this as precautionary, a way to ensure banks don't over-do risky lending during market booms to avoid a wave of defaults when it has its downturns. So when you take a step back and look at the purpose of the rule, it shouldn’t affect us now, and any pinch that is felt will come much later on in the property cycle. The banks current tools for assessing debt repayment are already conservative enough to fall well within the new rules, so realistically when the changes hit July 1st, don’t expect much, if any change at all to your borrowing capacity. I liken it to setting an new speed limit during peak hour traffic, irrelevant in the short term when every car is sitting still, but put in place so when the traffic clears, speeds don’t get out of hand.

When the market does start to turn, and these DTI (Debt to Income) restrictions have an actual effect on the economy what should you expect? Simply put, you won’t be able to borrow as much. You will be restricted to only borrowing 6x your gross household income if you are buying a home to live in, or 7x if you are buying an investment. As with LVR rules there will be exceptions to this, so when you want to know more and know where you sit with these rules, contact your mortgage adviser and throw your questions at them, that’s what we're here for.

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