Debt-to-income tool finalised by Reserve Bank
The Reserve Bank is releasing its finalised debt-to-income (DTI) tool.
Monday, April 3rd 2023, 5:58PM 
4 Comments
by Sally Lindsay
The framework sets the technical specifications that banks need to comply with if a DTI tool is activated.
When implemented, DTI restrictions on residential mortgage lending set limits on the amount of debt borrowers can take on relative to their income.
By linking credit availability to income growth, DTI restrictions complement other tools the Reserve Bank (RBNZ) uses to support financial stability, including loan-to-value ratio (LVR) restrictions on residential mortgage lending.
Matters clarified by the RBNZ include the treatment of personal debt in DTI calculations, the calculation of business income, and the treatment of complex lending situations.
RBNZ director of prudential policy Kate Le Quesne says this supports financial stability by limiting higher-risk mortgage lending, thus reducing the likelihood of a future housing-related financial crisis.
Publication of the framework does not immediately activate DTI restrictions or set a calibration for them.
Le Quesne says instead, it provides banks with clarity in terms of the definitions of debt and income and future data reporting requirements.
It also provides them with a timeframe for making any changes to their internal systems and processes to be able to comply with a possible DTI restriction in future.
The RBNZ decided to add DTIs to its macroprudential policy toolkit in April 2022 and a public consultation on draft of the DTI framework was held in November 2022.
Le Quesne says stakeholders were generally supportive of the proposed design of the DTI framework and agreed with the RBNZ overall approach to keep the framework simple and clear.
The finalised DTI framework is being released alongside a regulatory impact statement, non-technical summary, and a summary of submissions document that contains the RBNZ’s responses to the key issues raised in the consultation.
Banks will be given 12 months to prepare their systems for possible implementation of DTI restrictions. The earliest date the RBNZ would introduce DTIs is likely to be March next year.
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Comments from our readers
I recall one prominent Auckland mortgage broker commenting that if this tool is introduced it will kill off a lot of his business to the point of exiting the market altogether! Another 'unintended consequences' policy that this RBNZ governor hasn't considered (or doesn't want to). Be interesting to hear from other mortgage brokers how they perceive this tool on there business?
Borrowers will be surprised when their existing debt including student debt, credit card limits (not the amount outstanding) plus any undrawn revolving credits are included in the D numerator.
If the DTI max was 4, a couple on joint income of say $100K with 30K student loans and $20K credit card limits would be able to borrow only $350K.
Even if pprescribed DTI was 6, they could borrow only $550K.
What carnage would that cause?
The introduction of DTI's is ultimately a political decision for our politicians to make. Both the main political parties have stated their apprehension to DTI's as they understand low & middle income earners will be at a distinct disadvantage unable to borrow enough to purchase a property. Shades of the CCCFA changes all over again.
Lets be clear on this fact. The RBNZ was the key architect for why house prices exploded by 40% during COVID. Mr Orr kept interest rates too low for too long & crucially did not make sure bank test rates remained at levels sufficiently high enough to account for when mortgage rates returned to historic norms.
The RBNZ are supposed to be the experts when it comes to monetary policy but clearly have no understanding of how the banks lend money to borrowers. The banks are not in the business of "risky lending".
DTI's are a solution looking for a problem.
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