Private property issue #55 - DTI regulations on the horizon

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This is your warning.

The Reserve Bank will probably introduce debt-to-income (DTI) restrictions in the next few years.

Two weeks ago, the Reserve Bank gave themselves the authority to bring in a DTI ratio at any time.

Once this comes in, you probably won’t be able to borrow as much. And your property portfolio will likely slow down.

This is big. Here’s what you need to know.

Another restriction on lending?!

A debt-to-income ratio will decrease how much Kiwis can borrow, which the Reserve Bank hopes will slow down house prices.

Here’s how they work. A DTI limits how much you can borrow based on your income.

To work out how much you can borrow:

Income x DTI = max borrowing

For instance, let’s say you and your partner earn $100,000 (together) a year.

If the debt-to-income ratio is 7, you can only borrow $700,000.

$100,000 x 7 = $700,000

So, is the maximum debt-to-income ratio going to be 7x?

We don’t know … the Reserve Bank won’t announce the exact DTI until they bring it in. But it will likely be 6x or 7x.

Will this stop me from growing a property portfolio?

Property investors and owner occupiers with large mortgages will be hit the hardest.

Look at this graph. At the peak, 40% of property investors were purchasing with a Debt to Income ratio of over 7x.

If the Reserve Bank had implemented a 7x DTI limit at that time, it would have potentially wiped out a large chunk of property purchases.

This would have stopped a large chunk of investors from growing their portfolios and from preparing for retirement.

How do I keep investing … even with DTIs?

It’s a lot. The DTIs come in addition to other recent lending rules like the Loan to Value Ratio restrictions (LVRs), the CCCFA, and bank stress tests.

So you might wonder, how do I keep investing?

There are three main ways:

1. Renovate properties to get a really high gross yield
   And I mean REALLY renovate. A property with a $700k mortgage would need a 14% gross yield (almost $1900 a week in rent) to cover itself under a 7x DTI limit

1. Use a non-bank lender
   This regulation only impacts the 18 registered banks. Non-bank lenders will likely not have to follow these rules. However, this comes with more expensive interest costs.

1. Buy New Builds

The DTIs don’t apply to new builds, so if you’re investing in new builds with us here at Opes Partners, you probably won’t be impacted by these changes.

When will DTIs officially come in?

Sometime from March 2024 onwards. While the rules are live now, the banks need time to change their IT systems.

However, the Reserve Bank says that … “we consider it likely that we will use this tool in future.”

My best guess is that next time property prices start to rise again, they’ll bring in a DTI … and bring it in quickly.

That’s why they’ve done the work now, so they can snap their fingers and bring it in later.

Is it all bad news?

There is one (small) silver lining. When the DTIs come in, the Reserve Bank says it is likely that the LVR restrictions could be loosened.

Let’s say you’ve got a decent income but are tight on deposit (equity). This new regulation might help you borrow more, depending on your situation.

What should I do to prepare my portfolio?

For some property investors, this change won’t impact them much … especially if you’ve got low debt or are investing in new builds.

But for others … you may not be able to become a property investor or grow your portfolio once these restrictions come in.

If that’s you, investing now before the DTIs come in could be a good idea.

I believe the best time to invest is when the bank’s willing to give you the money. In a year, they might not give it to you.