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Could Lending Get Harder?

At the end of January, the Reserve Bank announced that they had launched a consultation to activate debt to income (DTI) restrictions which are based around loan affordability and loosen loan to value ratios (LVR) which have been more about how far borrowers can leverage the equity in the properties used as security for residential lending.

There is some merit to what is being proposed. Borrowers are more likely to not pay their mortgages because of cashflow stress than equity being reduced, however I also believe there is serious overstep in applying it to investment lending as well as lending for borrowers own personal residences as in most cases overseas, they exempt lending for residential investment lending.

The initial DTI restrictions have been proposed as follows:

The proposed LVR changes are:

So what does this all mean?

I’ll get onto what effect the multipliers of 6 for owner occupied lending or 7 for investors may have shortly but it is worth noting the 20% each that the banks will be allowed to do outside these categories at higher settings.

My initial thoughts are that this was very promising as this allows quite a bit of leeway. Now that I have had more time to think about this, I believe that this is likely to be the Reserve Bank playing politics as they will want to be quite gentle about bringing new regulation in where the new coalition Government and particularly David Seymour has already shown that they want to reduce red tape.

I think what is likely to happen over time is that they will tighten these percentages as and when they see fit. We have already seen this with how they have handled the LVR restrictions over the now almost 11 years they have been in place with moving the investment LVR’s to reduce demand and also the percentage of lending banks can do above a LVR of 80% (note that above they mention increasing this to 20%, it is currently 15% and had been reduced to 10% towards the back end of the COVID property boom and only relaxed June last year and which resulted in first home buyers to a large extend being locked out of the market because of this.

I think the Reserve Bank is looking to softly implement these now as initially they won’t have too much impact as interest rates are high and the test rates banks already use mean that for many borrowers they will already struggle to qualify. Over time as interest rates drop the test rates will also track down and there becomes a point where DTI’s will become the handbrake.

At KPM we have already seen how they can impact borrowers as both ASB and BNZ temporarily introduced them across 2020 and 2021.

The basic formula is:

A few comments on the above which are worth noting:

There are exemptions

Besides the amounts allowed outside the standard multipliers there are other exemptions as well which are:

What should you do?

Get an understanding of how these changes may affect you. If you have existing mortgages or are looking to purchase over the next 12-24 months it is worth having an understanding so you can be in the best position possible. While these proposals have not been confirmed yet they are very likely to be what proceeds. If you would like us to do this for you Kris Pedersen Mortgages can assist with a no cost no obligation review.

Kris Pedersen
21 February 2024