New Zealand Banking Association calls for less restrictive debt-to-income limits for home lending than the RBNZ wants

Having previously opposed the Reserve Bank (RBNZ) introducing debt-to-income (DTI) restrictions on banks' home loan borrowers, now they're going ahead, the New Zealand Banking Association (NZBA) wants them loosened.

In January the RBNZ said it was proposing to introduce DTI ratio restrictions on banks' home lending, and loosen loan-to-value ratio (LVR) restrictions on their low equity mortgage lending. DTI restrictions limit the amount of debt borrowers can take on relative to their income.

In a consultation paper the RBNZ said it was proposing initially setting the DTI policy to allow banks to lend:

• 20% of their residential loans to owner-occupiers with a DTI greater than six; and

• 20% of their residential loans to investors with a DTI greater than seven.

It has proposed easing the LVR settings at the same time as activating DTIs allowing:

• 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%.

in a Submission to the RBNZ on its consultation paper NZBA suggests: "There may be some impact to owner-occupier borrowers under the current proposal of a DTI of six with a speed limit of 20%, due to some banks’ internal (more conservative) thresholds. We submit that a higher limit should be set for this borrower group, at a minimum of 25%, to allow for any additional conservatism."

It also argues the RBNZ's proposed setting for property investors is too low.

"There may, in our view, be some impact to investor flow at the current proposal of a DTI of seven with a speed limit of 20% due to complex lending scenarios. We submit that a higher limit should be set for this borrower group, i.e. 30%, to allow for these borrowers to still participate in the market as their DTIs tend to be higher," NZBA says.

The lobby group does, however, support the easing of LVR settings as proposed by the RBNZ.

Current LVR limits set a 'speed limit' on how much new low-deposit lending banks can do. At the moment the RBNZ policy classifies investor loans as high-LVR if they are more than 65% of the property’s value, and restricts high-LVR lending to no more than 5% of a bank’s total new investor lending. Owner-occupier loans are deemed high-LVR if they are more than 80% of the property’s value, with banks' high-LVR lending restricted to no more than 15% of a bank’s total new owner occupier lending.

The RBNZ has said its DTI proposals reflect an "approach of calibrating DTI restrictions, so they act as guardrails – in which they are binding during booms [such as 2021] but minimally binding during other times."

Dire warnings

In 2022 NZBA warned of "a real risk of adverse customer impact" if the RBNZ introduced DTI restrictions. And  in 2017 NZBA argued the RBNZ hadn't established that the benefits of a DTI tool outweighed its costs. Additionally NZBA argued DTIs could create a number of unintended consequences for both the housing market and the economy.

In 2015 NZBA pushed back against an RBNZ proposal to set a 2% speed limit on the LVR restriction for Auckland residential property lending, which would've meant banks could have done very, very little lending at LVRs of 70% or above to Auckland property investors in order to make sure they didn't breach the 2% speed limit. NZBA argued for a speed limit of at least 5%. Ultimately the RBNZ set that speed limit at 5% in November 2015, meaning no more than 5% of Auckland investor lending by registered banks could be at an LVR exceeding 70%.

Prior to the RBNZ announcing plans to introduce LVR restrictions in 2013, NZBA questioned whether there was any need for the use of such macro-prudential tools, with LVR restrictions on low equity lending its least favoured option of four potential RBNZ tools. NZBA described LVR restrictions then as a "weak tool with low welfare gains from a policy perspective," saying they'd be difficult and costly for banks to implement.

Consultation closed on the RBNZ's proposed DTI settings and changes to LVR settings on March 12.The RBNZ says it'll now decide on the activation and initial settings of the DTI tool, and expects to share its decisions in the middle of 2024.

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