The Reserve Bank of New Zealand will implement restrictions by the middle of this year, which will likely limit home loan lending during boom times.

From July 1, the Reserve Bank will put in place new debt-to-income ratio (DTI) restrictions to limit the volume of high debt-to-income lending banks can extend.

But the central bank will also ease loan-to-value ratio restrictions (LVRs), allowing banks to lend out more low-deposit loans.

The restrictions will apply to new lending on residential properties in New Zealand for both owner-occupiers and investors.

Changes to DTI rules would enable banks to structure their loan portfolios so that:

• Up to 20 per cent of new loans to owner-occupiers could be issued to borrowers with a DTI ratio exceeding 6.
• Up to 20 per cent of new loans to investors could be allocated to borrowers with a DTI ratio above 7.

Other changes to LVRs would allow them to have a mortgage book with:

• 20 per cent of owner-occupier lending with an LVR greater than 80 per cent.
• 5 per cent of investor lending with an LVR greater than 70 per cent.
  
  This is a loosening of current LVR rules, which have a 15 per cent limit on owner-occupier lending above 80 per cent LVR and 5 per cent on investor lending with an LVR greater than 65 per cent.

The Reserve Bank said the new DTI restrictions included an allowance for banks to do 20 per cent of their lending outside specified limits.

“This will improve efficiency by letting banks exercise their own discretion and manage complex cases.”

Different tools for different folks

DTI and LVR restrictions are macroprudential policy tools aimed at promoting financial stability by restraining excessive lending during booms and enhancing bank resilience during downturns.

RBNZ deputy governor Christian Hawkesby said LVRs targeted defaults by limiting bank losses in the event of a housing downturn, while DTIs reduced the probability of default by preventing new lending from getting too far ahead of incomes.

“Both act as guardrails reducing the build-up of high-risk lending in the system,” Hawkesby said.

The Reserve Bank said banks had already been given 12 months to prepare their systems for the possible implementation of DTI restrictions, and today’s announcement of the timeline followed a consultation period launched in January.

Hawkesby said LVRs and DTIs complemented each other.

Easing LVRs would allow more people to enter the housing market, by requiring smaller down payments.

Doing it at the same time as DTIs were tightened ensured new entrants weren’t taking on more debt than they could handle relative to their income.

The Reserve Bank argues by adjusting these levers it is managing different types of risks to the financial system: with LVR restrictions it is targeting default risks from undercapitalised loans, while DTIs address default risks from income insufficiency.

In a note released in January, ANZ said heightened DTI measures would likely soften house lending during boom times but not have much of an effect above LVRs during other periods. The bank’s economists said DTI rules limited lending in instances where interest rates were low and the housing market was booming.