PHOTO: The Reserve Bank of New Zealand. FILE

The Reserve Bank is suggesting new regulations that would restrict the size of home loans for large borrowers in relation to their incomes.

The proposed debt-to-income (DTI) restrictions are under consultation and would complement existing measures, such as loan-to-value (LVR) restrictions. The central bank is considering permitting banks to lend 20% of their residential loans to owner-occupiers with debt-to-income ratios exceeding six, and 20% of new lending to investors with a ratio surpassing seven.

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Household income would be the basis for measurement, and the thresholds and “speed limits” could be adjusted based on market dynamics. The Reserve Bank aims to enhance financial stability by using the LVR tool to reduce potential losses in mortgage defaults and the DTI tool to lower the likelihood of widespread household defaults.

Deputy Governor Christian Hawkesby stated, “Introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies.” The proposal would also allow the bank to relax LVR settings without increasing risks to financial stability.

Simultaneously, the bank plans to ease LVRs to enable banks to lend 20% of loans to owner-occupiers with a deposit of less than 20%, and 5% to investors with a deposit or equity of less than 30%. Currently, only 15% of lending can be to owner-occupiers with less than 20%, and investors need a 35% deposit.

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The Reserve Bank assured that the DTI tool would minimally restrict residential lending during normal times but would act as a guardrail against risky lending during economic booms.

While concerns were raised about the potential impact on first-home buyers, the Reserve Bank noted that data indicated they typically borrowed at lower DTI ratios. The bank believes that the introduction of DTI restrictions could potentially provide first-home buyers with more access to the market.

If the Reserve Bank decides to proceed with DTIs after the consultation, the rules would take effect in the middle of the year, with exemptions for certain lending, such as newly constructed homes. Corelogic chief economist Kelvin Davidson suggested that the change might not have a significant impact in the current market, as mortgage rates are currently influencing borrowing behavior. Only around 10% of investors and owner-occupiers would be affected by the proposed rules.