There has been lot’s of talk in recent weeks about introducing some lending criteria to restrict the amount someone can borrow based on there income and this is being referred to in the media as a debt to income ratio calculation.
I stress that this is just a concept being talked about at this stage; however as they say “where there is smoke there is fire” and we are expecting some new lending criteria to be introduced soon – very soon!
How Soon Before We See A Debt To Income Ratio?
The idea of a debt to income ratio was been floated by The Reserve Bank (RBNZ) and while the media has been talking of the pending introduction it is still only an idea at this stage.
Looking through the Financial Stability report released this month, the RBNZ mentioned that “increasing housing supply is key and further efforts on a range of fronts should be considered to address the supply and demand imbalance” so to put something like in place they will have to get the green light from the Government.
The banks also apply a similar calculation already and are covered by the Responsible Lending Code which means they are not meant to lend money to someone if it is deemed they cannot afford to service the debt.
In the UK they already have a debt to income calculation used when getting a mortgage. In the UK (since June 2014) the specific debt-to-income ratio for mortgages should be no higher than 45%. This means that your mortgage alone cannot take up more than 45% of your income.
You can use the Debt to Income Calculator to work out how much debt you have in comparison to your total income.
We do not know if any calculation introduced here would be the same as in the UK, but we do know that there have been references made to the system used in the UK and it would makes sense to base any rules on existing rules used elsewhere … if they in fact work.
If Introduced, What Could Happen With House Prices
Whilst this could slow down the market, it is still seen as a band-aid solution to a bigger problem. The fact is there is an imbalance between supply and demand of property in Auckland where mortgages tend to be the largest in New Zealand.
Like many interventions, the introduction of a debt to income rule will have an impact initially but there are likely to be side-effects too. There will be some people that want to buy a home and can afford the repayments but may not be able to fit the income criteria required.
As leading New Zealand mortgage brokers we have concerns about how and when this might be implemented and have suggested that anyone with investment properties review their existing lending arrangements.
- Are you a property investor?
- Are you reviewing your mortgage structures?
How This Works In The UK
Barclays say UK’s mortgage rules mean they have to check whether you could still make mortgage payments if your income falls or your monthly repayments increase because of a change in interest rates. So when you apply for a mortgage, they will consider your income, debts and regular spending and your personal circumstances
Your income – you’ll need to provide documents that support what you’ve told us about your;
- Regular income from work, self-employment or pensions and investments
- Additional payments, like overtime, bonuses and commission
- Other income, like state benefits, rental income, trust funds and maintenance payment
Your debts and regular spending – we’ll consider how your current and future commitments could affect your ability to afford your mortgage repayments, including;
- Cards and overdrafts
- Credit agreements and loans
- Property commitments
- Family commitments, including maintenance
- Pension payments
Your circumstances – we’ll also consider your circumstances today and how you think they may change in the future, including;
- A change to the interest rate you pay
- Your planned retirement age
- Additions to your household, like children or relatives you need to care for
- Unforeseen changes, like illness, accidents and divorce
- Changes to your working life, like redundancy or relocation
At the moment the banks in New Zealand focus on the immediate and past – they do not generally consider what might happen in the future.
A Rule For Owner Occupiers Only
The loan to income rule in the U.K only applies to mortgages on owner occupier properties and loans for investment property have other restrictions like rent should be 125% of monthly interest cost. Many banks in Australia have tightened their guidelines for lending to housing investors, either making loans tougher to get or more expensive.
Last year in New Zealand new LVR rules were introduced by The Reserve Bank for investment property;
Auckland Investor Loans – 30 / 5
This class of loan is for borrowing secured against property that includes investment property in the Auckland Council area. Low-deposit (high-LVR) loans within this category are defined as those loans which are more than 70% of the property’s value (30% deposit). High-LVR loans can make up no more than 5% of a bank’s total new lending within this category – lower than the initial restrictions.
Non-Auckland Investor Loans – 20 / 15
This class of loan is for borrowing secured against residential properties located outside the Auckland Council area. Low-deposit (high-LVR) loans are defined as those loans that are more than 80% of the property’s value (20% deposit). High-LVR loans can make up no more than 15% of a bank’s total new lending within this category – easier than the initial restrictions.
(Source: http://www.rbnz.govt.nz/financial-stability/loan-to-valuation-ratio-restrictions)
At this stage there has been little mention of how the income to debt ratio might be applied to investment property in New Zealand.
In Conclusion…
Most people accept that there will be changes to the way banks lend money. Many of the changes are due to the fact that Auckland house prices are increasing at a rate that makes the Government and The Reserve Bank nervous, and is meaning it is getting harder for first home buyers to get onto the property ladder.
In New Zealand we do not yet have a debt to income ratio, but it is being talked about.
