Key Facts:

– Reserve Bank Governor Adrian Orr suggests that debt-to-income (DTI) ratio restrictions on banks’ mortgage lending could be implemented with loose settings.
– The Reserve Bank has been given permission to use the DTI tool and has informed retail banks to be prepared for its deployment by April 2022.
– No decision has been made yet on whether a DTI ratio rule will be implemented, but preparation work has been done.
– Consultation on possible implementation and initial settings will take place in the first quarter of 2022, with the restrictions potentially coming into effect around mid-2024.
– The Reserve Bank may set up a DTI ratio initially without it being binding, allowing for gradual adjustment if necessary.
– DTI restrictions aim to limit the amount of high-risk mortgage lending and reduce the chances of a housing-related financial crisis in the future.

Article Summary:

The Reserve Bank of New Zealand (RBNZ) has hinted at the possibility of introducing debt-to-income (DTI) ratio restrictions on banks’ mortgage lending. This comes after the RBNZ received approval to include the DTI tool in its macro-prudential toolkit in 2021. The regulator has informed retail banks to be prepared for the potential deployment of DTIs by April 2022. However, the decision to implement DTI ratio rules has not been finalized yet, and consultation on implementation and initial settings will take place in early 2022. If implemented, the restrictions could take effect around mid-2024.

Governor Adrian Orr suggests that the initial DTI settings may be relatively loose to avoid restricting buyers’ access to credit. The current loan-to-value ratio (LVR) rules are not seen as the main constraint on borrowing, but rather the ability to afford higher interest rates. The RBNZ aims to use the DTI ratio as a measure to address excesses in the economy when it becomes binding. The regulator acknowledges that the housing market has stabilized but is concerned about potential future risk-taking, particularly with incoming property-investor friendly legislation and high migration leading to increased prices.

DTI restrictions would limit the amount of debt borrowers can take on relative to their income, thereby reducing high-risk mortgage lending. The impact on first-home buyers will depend on the specific settings chosen, but it is expected to predominantly affect investors who tend to borrow at higher DTI ratios on average. The RBNZ hopes that implementing DTIs will help prevent a housing-related financial crisis and potentially allow for the loosening of existing LVR restrictions.

Source Link: To read the full article, click here.