Mortgage Debt to Income Ratio (DTI)

Debt-to-income ratio caps in New Zealand

Keeping debt at a manageable level is important for good financial health.

Your debt-to-income (DTI) ratio is a financial measure that is used by lenders such as banks when you apply for lending. The ratio compares the amount of debt you have to your overall household income. DTI is used by lenders to assess your ability to meet debt repayments.

Your DTI ratio is calculated by dividing your total debt by your total gross (pre-tax) income. It shows you how many more times your debt is in relation to your total income.

DTI’s Introduced To New Zealand

The Reserve Bank of New Zealand (RBNZ) is New Zealand’s central bank, and it supervises all registered banks operating in the country, including household names such as ANZ, BNZ, Westpac, ASB, and TSB.

In 2024, the RBNZ set DTI rules which banks need to follow. These restrictions apply to new loans for residential homes, for both owner-occupiers and investors.

The DTI rules are additional to the existing loan-to-value (LVR) rules, which set out how much low-deposit lending banks can make. These rules are in place to ensure banks don't take on too much risk. In other words, they aim to ensure banks do not take on too much risky lending during economic ‘booms’, which could then result in a wave of people unable to repay their mortgage during economic downturns. This helps support New Zealand's financial stability and reduce the likelihood of a future housing-related downturn.

How to Calculate Your DTI

As an example, say you are a couple with:

• A home loan of $800,000, a personal loan of $12,000, credit card debt of $5,000 and BNPL debt of $3,000. This takes your total liabilities (debts) to $820,000

• Annual earnings of $95,000 each before tax. Your combined gross annual household income is $190,000

Your total debt of $820,000 is divided by your total pre-tax income of $190,000, which means your DTI is 4.32.

What Do DTI Requirements Mean For You?

To obtain lending, if you're an owner-occupier or investor, you'll need to meet bank lending criteria to ensure that you're able to make repayments on your loan, as well as other criteria, such as DTI and LVR requirements.

Owner-occupiers

If you’re buying a house to live in, you’ll generally need a DTI ratio of six or lower.

Investors

If you’re purchasing an investment property, you’ll generally need a DTI ratio of seven or lower.

Exemptions to DTI

There are plenty of exemptions to the DTI rules, despite the ratios mentioned above. The exemptions include the following:

• Refinancing a mortgage, where the new loan value doesn’t exceed the original loan value.
• Portability. This is where you ‘keep’ your home loan when selling one property then repurchasing a different property, by securing the mortgage from the old property to the new one. This includes where you move the existing loan to a new bank. The exemption only applies if the value of your new loan doesn’t exceed the value of the original loan for your old property.
• Bridging finance.
• Property remediation (for example, to fix a leaky home).
• Construction loans. This applies where you are constructing a new home, are purchasing a newly built home from the developer within six months of completion or are purchasing as part of the Government’s KiwiBuild programme.
• A portion of a bank’s new lending is allowed to go towards home loans that exceed the DTI thresholds (also known as high-DTI lending).

Banks will also consider other lending rules and their own lending criteria and carry out their own affordability assessments. These will influence whether they decide to lend to a prospective borrower or not, and the amount they will ultimately lend.

In addition, when it comes to applications with a high DTI ratio, exceptions can be made in certain circumstances. If you have a high DTI ratio, it's still worth talking to one of our lending team about your options.

Learn more:

• ‍The benefits of using a mortgage broker (“mortgage adviser”)‍
• ‍Why do cities become unaffordable?‍
• How to buy your first home
• Should you make extra mortgage payments?
• Refinance your mortgage
• Mistakes to avoid when you’ve got a mortgage

Could DTI Ratios Mean One Size Fits All?

Over recent years, we have seen how simple policy statements about housing and mortgage lending can become complex in application, including areas such as changes to bright-line tax (capital gains tax), interest deductibility on investment properties, and other changes.

As DTIs are a reasonably recent addition to the New Zealand property and mortgage ecosystem, the full impact remains to be seen.

Other Nations’ DTI Restrictions

It’s worth noting that other countries have DTIs, sometimes combined with a ‘speed limit’.

For example, in the United Kingdom, banks can only advance up to 15 percent of the number of new mortgages at a DTI ratio greater than 4.5. This still hasn’t stopped London from becoming one of the most expensive cities in the world to buy a home!

It’s Still All About Mortgage Serviceability

Currently, for most borrowers with a large enough deposit (or enough equity for those who already have lending), a bank’s assessment of their loan servicing ability is already the most important driver of the maximum amount that can be borrowed.

Banks typically use a net income surplus test for originating mortgages, which is designed to ensure customers will have enough residual income after mortgage and other commitments to meet their living costs. Banks also already factor in the potential for interest rates to rise into this equation, which is called a stress test. In most cases, this is the toughest hurdle for borrowers to overcome, not the DTI ratio.

The Bottom Line: Debt to Income Ratios

At the end of the day, your debt-to-income ratio isn’t just a number, it’s a snapshot of how comfortably you can borrow without stretching yourself too thin. The RBNZ has decreed lenders must use it to decide how much risk they’re taking, but the real power lies in using it as your own financial compass. If your ratio’s looking healthy, you’ve got options. If it’s tight, there are levers to pull to get it back on track, or there are plenty of exemptions you may have in mind.

If you’re ready to see where you stand or are keen to see how much more you could achieve, then our lending team is here to crunch the numbers with you, explore smart strategies, and open the door to your next opportunity. Get in touch today and let’s make those numbers work for you!