From 1 July, 2024, significant changes came into effect that impact property investors in New Zealand. The Reserve Bank of New Zealand (RBNZ) introduced Debt-to-Income (DTI) restrictions, while Loan-to-Value Ratio (LVR) restrictions have eased slightly. This guide helps property investors understand the changes and implications.
Stabilising the housing market
To reduce high-risk lending in New Zealand's banking sector, the Reserve Bank of New Zealand (RBNZ) has implemented DTI restrictions and adjusted LVR restrictions. According to RBNZ Deputy Governor Christian Hawkesby, DTIs and LVRs work together to stabilise the housing market.
“LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing downturn. While DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt. Both act as guardrails reducing the build-up of high risk lending in the system.”
Debt-to-Income and Loan-to-Value explained DTI ratios measure the amount of debt a borrower can take on relative to their gross income, while LVR restrictions are designed to protect property owners against housing downturns, particularly affecting highly indebted homeowners and investors.
Starting 1 July 2024, the new DTI settings allow banks to make just 20% of new owner-occupier lending to borrowers with a DTI ratio over 6 and 20% of new investor lending to borrowers with a DTI ratio over 7. Financing for new builds, refinancing (without exceeding the original loan value), bridging finance and property remediation are exempt from DTI restrictions.
At the same time, LVR restrictions have eased to allow banks to make 20% of owner-occupier lending to borrowers with an LVR greater than 80% and 5% of investor lending to borrowers with an LVR greater than 70%, up from 65%. The restrictions only apply to new loans and won’t affect existing borrowers unless they seek a ‘top-up’ loan which exceeds the required threshold.
Impact on property investors
Changes to DTI and LVR will affect how property investors approach financing. Investors with high DTI ratios may find it harder to secure financing or find their borrowing capacity reduced under the new DTI measures. A proactive approach to negotiating loan terms and
exploring different lenders are essential to finding the most favourable rates and conditions.
Slightly eased LVR rules will allow more low-deposit lending, potentially enabling those investors with less initial capital to enter the market, or offer higher loan amounts with smaller deposits providing an opportunity to buy more expensive properties or expand property portfolios faster.
Understanding and adapting to these new regulations may be challenging, so it pays to work with an expert who understands the intricacies of DTI and LVR regulations and can help you secure the right financing for your investment properties.
Source: mortgage-express.co.nz