Major Changes to Mortgage Rules by the Reserve Bank: What It Means for You

The Reserve Bank of New Zealand has confirmed significant changes to mortgage lending rules, effective from July 1, 2024. These changes will ease loan-to-value ratio (LVR) restrictions and introduce debt-to-income (DTI) ratios, impacting both first-time homebuyers and property investors. Here’s a detailed overview:

Current Rules Until July 1, 2024

Loan-to-Value Ratio (LVR) Restrictions

1. Owner-Occupiers: Currently, banks can only issue up to 10% of their new lending to owner-occupiers with a deposit of less than 20%. Generally, a 20% deposit / LVR of 80% is required. Banks are limited by the RBNZ and can only lend 15% of total mortgages for owner-occupied residential property to first home buyers with an LVR up to 90% or a deposit less than 20%.
2. Investors: For investors, the current LVR limit is stricter. Only 5% of a bank’s new lending can go to investors with a deposit of less than 35%. This has made it challenging for investors to enter the market with smaller deposits.

New Rules from July 1, 2024

Easing of LVR Restrictions

The Reserve Bank will relax the LVR limits, making it easier for borrowers with smaller deposits to secure a mortgage: 

1. Owner-Occupiers: The limit for loans with an LVR above 80% will increase from 10% to 15% of new lending. LVRs will be eased to allow banks to make 20% of owner-occupier lending to borrowers with an LVR greater than 80% 
2. Investors: The limit for loans with an LVR above 65% will rise from 5% to 10% of new lending. 5% of investor lending to borrowers with an LVR greater than 70%.

Introduction of DTI Ratios

The Reserve Bank will implement DTI restrictions to ensure that borrowers do not overextend themselves:

1. Owner-Occupiers: The DTI ratio will be capped at six times their income. For example, a borrower with an income of $100,000 can borrow up to $600,000.
2. Investors: The DTI ratio will be capped at seven times their income, allowing a $100,000 income to support a $700,000 loan.

Impact on Different Borrowers

First-Time Homebuyers

First-time homebuyers stand to benefit significantly from these changes:

1. Lower Deposit Requirements: With the easing of LVR restrictions, more first-time buyers can enter the market with lower deposit.
2. DTI Restrictions: While the DTI caps may limit borrowing, they also help ensure that borrowers do not take on unsustainable levels of debt, promoting long-term financial stability.

Property Investors

Property investors will see a mixed impact:

1. Eased Deposit Requirements: The reduction in LVR limits means investors will need slightly lower deposits.
2. Borrowing Limits: The new DTI restrictions will cap the amount investors can borrow relative to their income, potentially reducing speculative buying and stabilizing the market.

Market Implications

The Reserve Bank’s adjustments aim to create a more stable and sustainable housing market:

1. Stabilizing Prices: By tying borrowing more closely to income levels, the new rules are expected to prevent dramatic price increases and support more stable long-term growth.
2. Reducing Risks: The changes are designed to mitigate the risks of boom-and-bust cycles in the housing market, enhancing overall financial stability.

Conclusion

These upcoming changes by the Reserve Bank mark a pivotal shift in New Zealand’s mortgage lending landscape. By easing LVR restrictions and introducing DTI ratios, the Bank aims to support sustainable house price growth and financial stability. Whether you’re a first-time homebuyer or an experienced investor, it’s crucial to understand how these changes will affect your borrowing capacity and strategy.

Stay tuned to our blogs for ongoing updates and expert analysis on these and other important changes in the mortgage market. If you are currently in the market exploring all types of mortgage products/rates, we can help you. Talk to our team of experts – 021 707 540 or email us at [email protected]