The Reserve Bank plans to bring in the long-expected debt to income ratios (DTI) but ease the loan to value ratios. Photo: RNZ / Nate McKinnon
The Reserve Bank is looking to revamp its rules for retail bank mortgage lending.
It plans to bring in the long-expected debt to income ratios (DTI) but ease the loan to value ratios (LVR) as a way of reducing risks to the financial system from property lending.
Deputy Governor Christian Hawkesby said the controls would better manage the risk of boom and bust in the finance system..
"We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies."
DTI restrictions set limits on the amount of debt borrowers can take on relative to their income, and are designed to reduce the probability of financial system weakness triggering a wave of borrowers defaulting.
The decade-old LVR restrictions are aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage.
The RBNZ was proposing the debt to income ratio for owner-occupiers would be six, and for investors seven times their income.
On that basis owner occupiers would need $100,000 income for a loan of $600,000 and investors $100,000 for a $700,000 loan.
Lending banks would be allowed to have no more than 20 percent of their new lending above that level for owner occupiers and 5 percent for investors.
At the same time loan to value limits would be eased to allow banks to lend to a maximum 20 percent of owner occupiers with deposits of 20 percent or less the value of a property, and 5 percent of their lending to investors with a deposit of 30 percent or less.
Hawkesby said the limits would still give banks the discretion to lend to low deposit customers, and the new DTI mechanism would better suit first home buyers, who might be able to service a large loan but who might struggle to raise a deposit.
He said the housing market was now at a more sustainable level after last year's decline.
Impact on housing market debatable
CoreLogic chief property economist Kelvin Davidson welcomed the Reserve Bank's plans, which he described as a significant shift in the lending landscape.
"We've had house prices rising way above incomes for several years so from that perspective DTI caps are not a bad idea.
"They will tend to help housing affordability over the long term.
"It might not improve affordability but it will perhaps stop it getting any worse because it does tie house prices more closely to incomes."
Whether the change will impact the housing market is debatable.
"The introduction of DTI caps are about the next cycle, it's not so much about this one," Davidson said.
"It may not do much initially, but it's for when mortgage rates fall again and people can start taking out bigger loans."
He said it may restrict people from owning multiple properties.
"There's simply a limit on how much debt you can get. Income takes a while to build up, so it does limit how many properties you can buy in the short term."
While Davidson said some buyers may be tempted to rush in to avoid "being caught out" by the DTI system he did not think many people would take that approach.
High mortgage rates and serviceability testing already restricted people's lending powers, he said.