NZ debt to income ratios: The essential guide

NZ’s DTI laws are designed to ensure that borrowers can afford their repayments by tying the amount they can borrow to their before tax (gross) incomes. Borrowing includes all debt - from credit cards and car loans, to home loans and overdrafts. 

• Owner occupiers can borrow no more than six times their gross income. 

• Investors can borrow no more than seven times their gross income. 

Not all borrowing is subject to DTIs. Banks are still allowed to do 20% of total lending to homeowners and investors exceeding these DTI restrictions. This is called high DTI lending. 

As well as DTIs, banks will apply their own lending criteria. They may have their own debt to income ratio, plus other calculations they use to ensure you can afford repayments. You’ll have to meet both DTIs and the bank's lending criteria to secure borrowing. 

DTIs apply to most borrowers in New Zealand but there are a few exemptions:

• Kāinga Ora loans, like the First Home Loan.

• Refinancing, as long as your new loan isn’t more than your old one. 

• Loan portability, where you move your home loan from one property or one bank to another, as long as your new loan isn’t more than your old one. 

• Bridging finance. 

• Property remediation, for example a leaky home, or repairing damage after a flood.

• Construction loans, when you’re building a new home. 

• Buying a Kiwibuild home. 

• Buying directly from a developer within six months of completion.

The RBNZ is responsible for ensuring the stability of our financial system. With that in mind, they introduced debt to income ratios for a few reasons:

• To ensure that Kiwis can afford their mortgage repayments and aren’t under mortgage stress. 

• To make sure that Kiwis don’t take on too much risky debt during boom times that could then result in defaults during downturns. 

This is just one of the ‘macroprudential tools’ that the Reserve Bank uses to influence the economy and financial system. They work along with loan to value restrictions (LVRs) to reduce risk. 

One of the welcome side effects of DTIs is that they will moderate the property market’s more extreme booms. After all, if you limit the amount home buyers and investors can borrow, you’ll limit the amount they can pay for a property. 

Will DTIs affect property prices right now? According to  property investment advisers, Opes Partners, no. Here’s why. 

• When interest rates are high it’s hard to borrow much because it’s more expensive and borrowers can afford less. 

• As a result only 6-7% of lending is going to high DTI borrowers as of late 2023. 

• That means DTIs won’t affect most of the lending that banks do until interest rates decrease.

In areas like Southland, Taranaki and the West Coast house prices are low and incomes are relatively high. That means these areas won’t be as affected by DTIs. In other areas like Queenstown Lakes, Mackenzie, Coromandel and Tauranga where house prices are high, DTIs may affect the market a bit more.

It’s expected when interest rates fall and house prices start to increase DTIs may limit borrowing more. This will keep prices from spiking dramatically like they did in 2021.

In late 2021 when the average one year fixed interest rates averaged around 2.2%, the percentage of investors borrowing at a high DTI peaked at 39.1% and high DTI owner occupiers peaked at 28.6%, according to Reserve Bank data. 

The DTI rules would have smoothed this peak considerably and reduced house price increases. 

• Investors with large portfolios who rely on capital gains and to make returns may be more affected. Rental income counts as income, so investors who focus on high rental yields may fare better. 

• First home buyers will most likely be least affected because they tend to borrow at the lowest DTIs. 

While we may not see a 30% house price increase again, house prices are likely to continue to rise. 

That’s because lending growth is tied to wages and wages tend to increase by at least 4% a year on average. What’s more, lots of Kiwis aren’t borrowing at their DTI limit, so even if wages don’t increase there’s still some room for total lending and house prices to go up. International evidence from other countries that have introduced DTIs like Ireland, shows that house prices tend to continue to increase, albeit at a reduced rate. 

A total of 20% of bank lending can be to borrowers with high DTIs. That means that you may still be able to secure a mortgage from a bank, even if your DTI numbers don’t add up. Banks may be more likely to lend with a high DTI to borrowers they have an existing relationship with, who have solid histories of repaying debt and high incomes. If you don’t have a close relationship with a lender, it’s best to speak to a mortgage broker - they’ll be able to provide advice on whether banks will lend to you (and which banks are most likely to).

It may seem obvious, but it’s an important thing to remember. Your DTI isn’t a static number. Before you apply for a home loan you can improve your DTI by:

• Paying down debt. 

• Cancelling credit cards (borrowers look at the card limit, not the balance). 

• Not using buy now pay later services. 

• Increasing your income.