Private property issue #93 - DTI changes

The Reserve Bank just announced big changes for property investors.

So let's go through:

• The new Debt-to-Income mortgage rules (DTIs).
• The new deposit rules (must-read)
• What will happen to the property market?

What are the new DTI rules?

Debt-to-income ratios (DTIs) tie the amount you can borrow to your income.

Here are the rules the Reserve Bank plans to bring in:

• 6x your income – for an owner-occupier
• 7x your income – for a property investor

If you and your partner earn $100k a year combined, the maximum you can borrow is:

• $600k if you are an owner-occupier.
• $700k as an investor

The new rules only count if you are buying an existing property.

If you buy a New Build, forget the new rules. They don’t impact your mortgage application.

What counts as debt and income?

All your rent counts in the calculation. So, if you’re an investor earning $100k in salary and $30k in rent, your income is $130k in the calculation. That’s what you multiply by 7.

Your debt includes everything. That means mortgages, credit cards, personal loans, and student loans.

Case Study: Can this couple buy an investment property?

Here’s a case study. Let’s see if this couple can afford to invest.

Jen earns $100k. Her partner, Tim, earns $50k. So, their household income is $150k.

They own their own home and have a small $350k mortgage.

How much can they borrow for an investment property?

Their income is $150k, but they don’t multiply that by 7.

Because if they buy an investment property, it might rent for $600 a week ($30k-ish a year). This counts, too.

Add the rent in, and their annual earnings are $180k. Multiply that by 7, and they can borrow up to $1.26 million.

But they already have a $350k mortgage and a $10k credit card.

Take that off, and they can borrow (up to) $900k under these new rules.

This is only if they are buying an existing property. New Builds don’t have to follow these new rules.

So if Jen wants to buy a New Build, these calculations don’t impact her. She just follows the current rules.

Want to see how the new rules impact you? I built a calculator so you can run your own numbers.

Click the image to test it out:

Investors need a lower deposit to buy properties

But wait, there’s more. The deposits are also changing.

Instead of needing a 35% deposit, you’ll soon only need a 30% deposit.

You might think: “That’s not a big difference”.

But renovation investors get a double whammy. Not only do you need a lower deposit, but you can also borrow more against your current properties.

Let’s say you have an investment property worth $1 million and a $550k mortgage.

Right now, you can borrow an extra $100k against this property.

Use that money as a 35% deposit; you can afford another (existing) property worth $287k.

Can’t do much with that.

What happens when the rules change?

You can now borrow $150k against your current investment property. Use that as a 30% deposit, and you can buy something worth $500k.

That’s right; you can afford a property worth 75% more.

The numbers don’t work out this way for everyone. But, some investors will soon find they can now afford an investment property when they couldn’t before.

Buying a New Build? Nothing changes. You still only need a 20% deposit.

When do all these new rules come in?

Probably June – July this year.

The Reserve Bank is consulting on these proposed rules. So banks (and any Kiwi) can make a submission.

They’ll make a final announcement in June this year.

What’s the impact on the property market?

At the start, these rules will boost house prices. Here’s why.

The new DTI rules will have almost no impact once implemented.

That’s because up to 20% of bank mortgages can be outside the rules.

So, around 1 in 5 investors and owner occupiers can get a “high DTI” mortgage.

But, interest rates are high. So it’s hard to borrow a lot of money right now.

Today, only 1 in 10 borrowers are getting these high debt-to-income loans.

That means banks could dole out even more high DTI loans and be within the Reserve Banks' new rules.

So, the DTIs won’t have an impact straight away. But the deposit changes will.

They'll encourage investors to get into the market, which could boost property prices.

Once interest rates fall, though, that’s where the DTIs come in.

We won’t be able to borrow as much as we otherwise could.

What’s the impact? It depends on where you live.

In parts of NZ (Invercargill, Taranaki), house prices are low, and incomes are healthy.

The average person buying the average home has a DTI less than 4. So the DTI rules will have less of an impact on the market.

In holiday hotspots (Queenstown and Coromandel), house prices are high compared to incomes. So, there is more scope for DTIs to slow the market down.

Here’s a map of the country, so you can see the estimated DTI in your area:

Have more questions? Check out this morning’s episode of the Property Academy Podcast. We cover everything you need to know. Listen here on Apple or Spotify.

Come to our next webinar (13th Feb). We’ll give you the full rundown of all the new rules. I want to come to the webinar.