UPDATED AT 6:33PM ON THURSDAY
BNZ is introducing debt-to-income (DTI) restrictions across its mortgage lending ahead of being made to do so by the Reserve Bank (RBNZ).
Investors and owner-occupiers won’t be able to get mortgages worth more than six times their gross annual income.
A BNZ spokesperson told interest.co.nz the change will initially apply to borrowers seeking a BNZ mortgage via a broker.
The new policy will take effect from the end of today (Thursday), and will be monitored and reviewed.
Meanwhile, ASB confirmed it's already using DTI multiples when assessing mortgage applications.
It didn't disclose the ratio[s] it's applying or say how long it's been doing so for.
An ASB spokesperson said, "In certain lending situations, particularly in the current low interest environment, we think it is prudent to consider DTI multiples, and we actively use these today."
A BNZ spokesperson likewise explained the bank is looking at the overall level of debt its customers take on "to ensure they are in a more secure position with rising interest rates".
They said BNZ regarded "increased regulatory focus on DTI ratios as a way to deliver a more sustainable housing market".
As for applying DTI restrictions via its broker channel "to begin with", the BNZ spokesperson explained, "DTI already forms part of the assessment across all our channels (through serviceability index assessments) and we’re continuing to look at how these changes will apply more broadly.
“Serviceability index assessments take a holistic look at a customer's financial situation - their income, expenses, financial commitments and current debts to ensure they are able to service their new lending. The DTI assessment is an additional overlay that only looks at the total levels of debt and the customer's income.”
Interest.co.nz asked the other major banks whether they were imposing set DTI ratios across their mortgage lending too.
A Westpac spokesperson said, "We assess a borrower’s ability to service a loan using a wide range of financial information including debt levels and income. A DTI ratio is calculated and included in portfolio monitoring and reporting, alongside other measures."
An ANZ spokesperson said, "ANZ continues to have internal frameworks to ensure affordability, and respond to changing market and regulatory requirements."
Orr: 'The more banks can do the mahi themselves, the less we need to be doing'
The RBNZ will start consulting, in mid to late November, on introducing debt serviceability restrictions. The consultation was due to start in October, but was pushed out due to Covid-19.
Finance Minister Grant Robertson in August agreed to give the RBNZ the ability to restrict bank lending by imposing debt serviceability restrictions on the condition it would “have regard to avoiding negative impacts, as much as possible, on first-home buyers, to the extent consistent with the Bank’s purposes and functions”.
Retail banks don’t of course need to have regard for this condition when imposing their own restrictions.
RBNZ Governor Adrian Orr told those tuned in to an Institute of Financial Professionals NZ virtual conference on Thursday afternoon that work from the RBNZ on DTIs is coming.
But he said, "The more banks can do the mahi [work] themselves, the less we need to be doing."
Orr said he was “really nervous” about new entrants to the housing market at a time interest rates are rising.
Indeed, from November 1, the RBNZ is requiring banks to ensure that no more than 10% of their mortgage lending to owner-occupiers goes to borrowers with deposits of less than 20%. Previously, 20% of their lending to owner-occupiers could go to this riskier cohort of borrowers. The move is effectively targeted at first-home buyers.
National's Housing spokesperson Nicola Willis described BNZ's move as a "massive blow for potential first-home buyers who will find it near to impossible to meet these lending criteria".
“Under Labour, first-home buyers have watched house prices race away from them at a faster and faster clip. Many will now give up all hope of ever buying their own home," she said.
162 Comments
I have been waiting to see the number that might be used for DTIs. We know its 4.5 in the UK, but we also know we have gone way past that, in some cases 8.
Well done BNZ, this will strengthen NZ banks which is a good thing, but I dont like the 6. 5.5 should be the max I think.
Student loan, childcare and medical insurance are already included in all affordability assessments as they impact on net income and outgoings.
If people have no student loan and no kids they have less expenses and can afford bigger loans. Someone may find their cashflow improves by $5000/month once their youngest turns 5 and their student loan is repaid, yet a DTI assumes their position is the same as it was when their expenses were $5000/month more.
DTIs are on top of this and a blunt tool. Anyone who thinks DTIs are an effective tool is likely pretty blunt themselves.
"Forced" to take on bigger loans.
It may be blunt but debt stacking is a threat to the greedy banking system, that we all need to function normally. Peoples greed needs a wide sweeping tool. Personally I'd rather a flat land tax to offset less income tax. But hay...we dont always get what you want.
No one is forced to do anything. Credit is a key to social mobility, otherwise it's just those who already have assets who can buy. These changes will increase inequality as property has been the only vehicle through which everyday Kiwis can have a comfortable retirement. That is about to be cut-off and it will be the landed gentry whose kids are able to buy and elites on 200k+ who will be able to afford to invest in property.
BNZ is definitely not a team player by making it hard for the little guy to get into the housing market.
DTI restrictions made EFFECTIVE FROM TODAY.
What if the other banks did the same, it'll shudder residential lending altogether and only the rich can afford properties and everyone else would be house poor. Agenda Twentythirty and for many, "You'll Own Nothing And Be Happy".
if you get paid a lot of money and you lose your job during a recession, chances are you will find it very hard to replace your prior salary and it will be harder to slash those private school fees and other high 'discretionary' costs. Arguably therefore, the multiple should actually be lower for high income borrowers.
Or alternatively private school fees should be included in affordability assessments? Nah, let's assume a single woman in her 40s with no kids who is earning a grand a week should have to stay in her house if she loses her job and isn't allowed to sell it.
Would love to see any evidence at all of your claim about high income earners not finding new jobs. Even if it's true people should be allowed to make their own decisions and take risks. Maybe they have to send their kids to public school even.
This is the same kind of paternalistic bullshit we saw at the end of the Clark era with their lightbulb compulsion. Let people make their own decisions, the world would be a miserable place if we let the Bloomfields of this world dictate to the public how people can live their lives. Auckland already is.
I remember the good old days when the DTI was effectively 3 and you couldn't buy a house on that with one income. Now the DTI is set to be 6 and you cannot buy a house on two incomes. The DTI does draw a clear line in the sand however, perhaps if you cannot afford the house at 6 you need to look at an apartment instead.
3 financial statements ??? There are 2 financial measures;
- 1 Cashflow which measures Income and Expenses tracking the movement of money over a time period, typically 1 year.
- 2 Financial position which measures Assets and Liabilities at a specific point in time, i.e. how much one has and owes today or on the 31st of March typically.
The two don't mix, accounting 101.
Here's an example why DTI is a flawed measure. John's income is $100k and he has a mortgage of $500k = DTI of 5, the bank is happy. Let's assume in a year's time interest rates double, would John be in trouble? Most likely Yes, has his DTI changed, absolutely not. Why ? "E" is missing, as in Expenses. An ETI (Expenses to Income ratio) measure would take care go that
It's not a complete measure, not is it proposed that it should be. Banks will still have their affordability calculations, and we still have LVR.
Looking at the numbers, it's very clear that the niche that DTI occupies is drawing curtains on leveraged investing, perhaps removing ~10% of all recent demand for houses (speculative guess - investors have been running at 15-20% of the market and I expect this to dramatically reduce if DTI is rolled out to all banks).
Another item in the Government and RBNZ's toolbox to bring down house prices.
There are 4 financial statements and they are absolutely linked to each other. Balance sheet is a point in time, cashflow and P/L describe how an entity got to that point in time, over the last however many months since the last balance sheet point in time.
The only leeway is that for average people who are wage-slaves, cashflow and I/E are pretty much the same, as they would be on cash-basis. (no time delay in income/getting paid/expense/paying).
Cashflow is more important in determining the a person's ability to service their obligations.
(4th statement is statement of changes in equity - which, again, an average wage-slave wouldn't need to worry too much about)
What the fricken heck is wrong with National !!!
"National's Housing spokesperson Nicola Willis described BNZ's move as a "massive blow for potential first-home buyers who will find it near to impossible to meet these lending criteria".
Good grief these moons make it hard to find an alternate Party to vote for.
In Yvil's little dream world interest rates can never go up significantly, nor can house prices correct, nor can people lose jobs etc. So why not lend mortgages at 7 or 8 times household income? What could possibly go wrong when all we've had for the past few years is lowering costs of debt and increasing prices..................
Which FHBs? The ones looking to buy in Auckland right now, or the vast majority of FHBs in the future who will benefit from actions bringing house prices down?
Edit: actually, thinking about it the statement is demonstrably false as 75% of FHBs meet these criteria already (in the most recent date from June)
Yes. making credit harder to get will lower prices and let the market reset to long term norms.
Schemes to assist first home buyers (look to AUS as an example - $50 grants led to an increase of same) increase prices for all - and thus more debt. Same theory here. Its all done to enrich the banks.
The answer is to make credit tighter, not looser - have you observed nothing?
Good grief these moons make it hard to find an alternate Party to vote for.
I think you misspelt 'morons'. Anyway, Nicola is just another populist who's good with dropping soundbites. She's as deceptive, snakey, and self serving as Ardern and Robbo. All cut from the same cloth.
Current National is a sorry sight. They don't even know what they want. They are in such a messy state that, unless they urgently get some serious leadership and a clear, definite and decisive direction with convincing policies, they will be completely toast in the next elections.
She is being completely disingenuous. This will have a far bigger impact on investors. Do the math - at yields around 5% this will have a much bigger impact on investors using rising equity increases to expand their portfolio.
reducing competition from investors will do far more to help FHB than any the harm caused by DTI restrictions
very very few minimum wage workers will be buying housing.
This initiative is being overhyped.
As others have said, loans higher than a DTI of 6 will be fairly rare anyway.
In the FHB market in Auckland, the typical couple have a household income of circa 150-180K, and are taking on a mortgage of circa 600-800K: well within the DTI of 6.
And this is likely the real reason for rental shortages and social housing waiting lists despite rental stock continuing to increase. Not enough young people are able to buy, more being forced to stay in the rental market for longer and longer.
We should really stop using policy to transfer wealth from younger and upcoming generations of Kiwis. This is a moral character problem before it's a policy problem.
If wages are much higher it's just a pendulum swing back after the wealth transfer to assets in the last few years. Needs to happen though, large wage increases and stagnant asset prices. For that we'd need to reward hard productive work though, rather than folk just sitting around on their ass-ets.
Most recent DTI summary release from RBNZ , albeit for DTI above 5
www.rbnz.govt.nz/-/media/ReserveBank/Files/Statistics/tables/c40/Debt-t…
The next C40 data which is a monthly release , will not be available oddly until November
This is also aimed at people with multiple properties, who can currently use the weight of a portfolio to out bid 1st time buyers.
As per all the housing restrictions recently, its not enough in the face of the many billions we have just printed, but in the right direction. Summer will be interesting. Lots more options now coming online for summer.
So 6 x household median $110,000 = $660,000 loan. (NB: The UK uses X4.5, which seems far more sensible)
Evaluated at, say, the average long-term mortgage rate in New Zealand, 7.5%, that's a monthly after-tax evaluated payment of ~$4,600 per month over 30 years. $~55,000 of the ~85,000 that Household will have in After Tax Disposable Income. Good luck living from the ~$575 per week that remains.
"But the actual cost of the mortgage today will be at about 5%, not 7.5%!" Sure. But why do we think the BNZ is bringing this policy in? To turn business away? (maybe!) or protect against what may happen?
Besides, the current additional $250 buck a week still isn't going to go far!
I don't think so - when I was looking for lending back in November 2020, none of the banks would lend me more than 6x my income then (not that I wanted to borrow that much anyway). All the data I have seen about FHBs with high DTIs is about lending at more than 5x income - it's possible that there has actually been very little lending to first home buyers at DTIs greater than 6. Have you seen any data on that?
Partial data here - not as bad as vested interests will make it seem.
25% of all FHBs over 6 DTI in July, 37% of Auckland FHBs.
https://www.rbnz.govt.nz/statistics/c40-residential-mortgage-lending-by…
Thanks for that - if I'm reading it right though that is millions lent, rather than individual loans granted. So given that people borrowing at more then 6x DTI are likely to be borrowing a lot more money, I'd expect the actual number of first home buyers who have borrowed at that level to be less than those percentages.
Anyone know how rental income is treated? Hopefully either excluded from gross income, or requires interest, maintenance, insurance, rates netted off against them.
DTI is the final nail in the coffin for the strategy of snowballing leveraged rental properties. When I looked into this previously, there will be 5-10% of FHBs caught up as collateral damage - but good for virtually everyone in the long run as house prices moderate and hopefully fall.
edit: as above - it's actually more like 25% of recent FHBs who would have been kneecapped. I may have been assuming the restrictions would be >7 DTI last time I thought about this.
Thanks to you and YourHomeLoan for this, sounds like a vaguely reasonable figure. I would suggest it's a little too generous, especially to those buying in Auckland where the property is unlikely to be cash flow positive to any real degree, especially if accounting for maintenance. Hopefully the RBNZ will tighten this up when the real regs come out.
Still worth realising that on a generous 5% yield, this rule only allows an LVR of ~20% for any new property unsupported by salary or other income. Crippling to those trying to quickly build a portfolio on their growing equity.
Edit: actually, I think I've misread - you did say net rent which will be much more damaging.
The banks are scaling rent by 30-50% in the current market off the back of the tax changes and CCFA changes.
Prior to these it was 20-25% mostly.
Effective result is gross yield to break even is up at 10-12% which is not doable. Investors are cooked. Borrowing power is heavily skewed to salary/self-employed income. And expect even more pressure on rents...
DTI is the final nail in the coffin for the strategy of snowballing leveraged rental properties.
Correct. Buy and Hold is no longer a viable strategy for most big investors as they won't be able to finance them. Expect property flipping to come back in a big way. The interest is all tax-deductible as well.
Rental income is scaled and then the end value is used for calculating income under a DTI. Net effect is borrowing power for buy and hold is reduced by 30-40%
Contrast the speed with which RBNZ acted without consultation to slash interest rates in 2020 when property prices were merely speculated to slide X RBNZ's foot-dragging & tardiness to act when house prices have actually spiralled up eg consultation , Covid, blah, blah.
Honestly, I bought at the peak price market, but I took the risk and got a mortgage before all these tools came in... With all these mortgage restrictions coming to fruition, it would've just made my life a living hell to save up even more money for the deposit while the housing prices continue to go up. It's just going to be impossible to buy anything (unless I relocate to a city in the middle of nowhere).
I feel so bad for the upcoming FHB's who are still looking or actively looking.... More pain is coming their way unfortunately.
The housing peak will be this summer. The RBNZ were to slow to raise rates but now changes are in progress beyond what the RBNZ can control, I'm expecting some pretty big hikes in rates from February 2022 and if Orr doesn't do it, the banks will just ignore him and do it anyway.
Totally. Unfortunately for many, it's the uncertainty of the big wide world and not knowing whether they have the skills to easily secure a job say in the UK and Australia as unemployment rates are on the rise over there.
One moment, it's fine then next moment, there's a lockdown for Australia and for the UK, one moment you're fine and next moment, you're waiting 2 hours in a queue in hope that the fuel station isn't emptied out of fuel before you reach the front of the line.
It's far more "comfortable" and safe knowing what you're dealing with if you were brought up locally to stay put than to risk not being able to get work overseas in spite of the high house prices. Due to the labour shortage here, it's relatively easy to pick up a job if you want and pay your bills than not to have any income at all in a foreign country.
In property timing is everything. These are assets we own for a lifetime & most people look at current MSM mania and can't see past wanting a new deck & next few months mortgage payment. Let along objectively looking at the next 5-10 years.
The most important is keeping options available, no matter whether I buy, rent, buy a rental first then buy home, invest in something else.
If I take this mortgage, what will be my options later?
Am I geared in a way to deliver maximum returns over a variety of market conditions?
This is excellent news for future rents.
On the other hand, landlords should be magnanimous enough to consider offering their tenants the option to prepay their rents with their home deposits to lock in the rents at the current rates to reduce the tenants'exposure to rising rents.
It's a win-win.
To the extent this actually does help rein in ridiculous prices it's a good thing. My main worry is that it just locks out the young and FHBs while prices continue their relentless march upward - that seems to have been the experience in the UK.
When investors apply for funding is the prospective rent for the property in question included in their income assessment or is it on their existing income?
Its really interesting to see the banks introducing DTi before the RBNZ does so. This is a signal to all that the RBNZ and the Banks have had a "nudge nudge wink wink" on this matter, and that its formal announcement is now imminent. How the debt snorting speculator community reacts will be when the following really telling signs occur....
- Listings increase significantly in the next couple of months
- Language changes to "must sell, overseas owners quits portfolio, all offers presented" etc.
- Listings start quoting a price vs agent driven, Auctions and PBN
- While listings go up, sales go down (owners want last years price)- so sorry.
- Mortgagee listings start to climb. Mainly crap rentals that should have been exited last year.
- Agent numbers start to decline...fast
- Prices start to go down as people cant meet the funding criteria of the DTi threshold,
- Which accelerates the specuvestors bailing out.
- Price decline becomes a circular argument, downwards.
Not owning an investment property or upgrading your current home to a new home is not a loss. Just sit tight, pay off your mortgage and enjoy the fun. You will live longer with less stress. Lots of stress is coming to the way of highly investors in housing market.
I'm not sure how DTI Central Govt. mandates are supposed to work?
After all, banks are meant to be determining the borrower's ability to afford what they lend, and stress testing it.
This seems to be saying banks are either consciously lending more than they know is financially prudent for their client or do not have the ability to assess what amount is financially prudent for their client.
Yes this a point I have often raised. Do we trust the banks to be prudent and leave them alone or are the banks' management acting in their best (short term) interests by lending recklessly with some view that the RBNZ will bail them out either directly or via propping up housing prices at the first sign of weakness?
Anything that is not a policy by rbnz is no good as banks many a time may bend their own rule under competition.
One wonder, why are they highlighting now in media.......may be RBNZ is plaining to bring a policy and banks ( who do not want) are trying to influence RBNZ to not impliment by showing that they are doing by themself so why bring law.
It worked then, for a little while, because median house prices relative to income was 3x ish. in fact this type of lending is one of the reasons for the median multiple blowouts.
If you can't increase much more the median multiple to increase the equity to cover a non-secured secondary position, what does the interest rate have to be to cover this?
Probably be able to buy a second home based on sharing your salary and other income over the properties. Maybe pick up another property every decade or two.
But yes, the stories of starting with $50k and building a portfolio of 10 houses in 10 years will be long gone if DTI spreads - and the country will be better for it.
Exactly. "Investors use equity"...biggest Interest.co.nz tui right there this year.
Many million doller homes rented for well less than the borrowing ratio proposed. Debt stacking for speculation has been the bane of NZ for the last fifteen years and the greatest lever of inequity in NZ. Hoping this blows the last 30% frenzy on house prices squarely in the back of the head, if not more.
Gonna deep fry my popcorn!
Whatever your income can add another $15000 to $20000 per annum as flat mate to boost loan by another $100000 and am sure must be other ways to manipulate - check with finance broker.
Also this 6 time is not fixed, if have good salary and deposit 7 time is no problem at all even now.
Banks are only highlighting it in media to influence RBNZ decession making and prevent them for passing it and making it compulsoary.
Ulterior vested motive for banks making it a headline.
If you’re a single average income household forget about ever buying your first home.
The government have literally killed your dream.
Meanwhile prices are galloping away again. I’ve watched auctions on the Shore now for a couple of weeks and the prices are beyond what anyone can fathom. Didn’t see anything passed in either.
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