The following is an illustrative example of the calculation of debt-to-income (DTI) restrictions from the Reserve Bank's Framework for Restrictions on High Debt-To-Income Residential Mortgage Lending released on Monday afternoon.
This is an example of how DTI restrictions would apply in a particular case. This example is not calibrated to the actual requirements but is for explanatory purposes. Assume that the bank condition of registration is specified as such:
(1) That, for a debt-to-income measurement period, the total of the registered bank’s qualifying new mortgage lending amount in respect of property-investment residential mortgage loans with a DTI ratio of more than 6, must not exceed 15% of the total of the qualifying new mortgage lending amount in respect of property-investment residential mortgage loans arising in the debt-to-income measurement period.
(2) That, for a debt-to-income measurement period, the total of the registered bank’s qualifying new mortgage lending amount in respect of non property-investment residential mortgage loans with a DTI ratio of more than 6, must not exceed 15% of the total of the qualifying new mortgage lending amount in respect of non property-investment residential mortgage loans arising in the debt-to-income measurement period.
Time period: the three calendar months from 1 February 2023 to 30 April 2023 inclusive.
A bank takes on 1,500 commitments to provide new residential mortgage loans during this period (that is, the date on which each of these becomes a commitment in terms of section 10 of this document falls on a date within the three months). 500 of these commitments are to provide property-investment residential mortgage loans and 1000 are to provide non property-investment residential mortgage loans.
Of these commitments, 120 are for mortgage loans falling within the exemptions in section 14 of this document. 20 of the exemptions relate to property-investment residential mortgage loans and 100 relate to property-investment residential mortgage loans,
Of the 480 qualifying mortgage loan commitments in respect of property-investment, 70 have DTIs of more than 6. Of the 900 qualifying mortgage loan commitments in respect of non property-investment, 130 have DTIs of more than 6. The total loan value associated with the 480 qualifying property-investment loans is $300 million.
The total loan value of the 70 property investment loans that have a DTI of more than 6 is $50 million. The total loan value associated with the 900 qualifying non property-investment loans is $500 million. The total loan value of the 130 property investment loans that have a DTI of more than 6 is $65 million.
In this case the bank –
♦ breaches clause (1) of the condition (the loan value associated with property investment loans with DTIs of more than 6 ($50 million) is 16.7 percent of the total qualifying new mortgage lending amount in respect of property-investment residential mortgage loans ($300 million); the maximum allowed is 15%); and
♦ complies with clause (2) of the condition (the loan value associated with non-property investment loans with DTIs of more than 6 ($65 million) is 13 percent of the total qualifying new mortgage lending amount in respect of non property-investment residential mortgage loans ($500 million); the maximum allowed is 15%).
16 Comments
The proposed framework is all talk, no substance.
See section 14.3.e.i.b => development is exempt, including buying existing houses and replacing them.
Also, the DTIs are not implemented as a fixed value, but as a % of mortgage lending ().
This will skew mortgages slightly lower, but at the example DTI given here (of 6) would have no effect on the market at all unless mortgage rates drop below 3% again.
So - did they use 6 as an example to not spook people, or are they actually going to implement something effective, come the day?
[edit: also, after 7 years of looking at this, they present a 22-page document that looks like it was put together by interns - gravy train much?]
Even more alarmingly, the linked document seems to treat rental income as simple gross income. No discounting for maintenance, insurance, rates, or tax.
When this was being discussed a year or two ago it sounded like a simple rule of thumb would be used, for example a 50% discount on gross rental income would be classified as 'income' for DTI purposes.
NZ makes Bloomie.
Signs of stress are emerging in New Zealand’s housing market, with the number of people behind on loan repayments jumping as soaring interest rates bite.
https://www.bloomberg.com/news/articles/2023-04-03/missed-mortgage-paym…
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