It seems imminent that the Reserve Bank will impose its debt-to-income (DTI) restriction tool for new borrowing as early as March 2024.

So, what is a DTI and how will it impact you?

That is exactly what we are exploring today, along with a quick peek at what’s been happening in the property world in the last month.

What Is A DTI?

A debt-to-income ratio (DTI) is a calculation used by lenders to assess a borrower’s ability to repay a mortgage. It is calculated by establishing the percentage of a borrower’s gross income that is used to repay debt, including the new mortgage payment.

As we know, The Reserve Bank has been proposing the introduction of a DTI restriction. The DTI restriction would be a control that would limit mortgage lending to borrowers. For example, if the DTI was set at 6.0, then a borrower’s total debt repayments (including the new mortgage payment) cannot exceed 6 times their gross income. [source]

The DTI proposal has not been implemented yet and is still under consultation. The earliest it would be introduced is March 2024. And it’s also important to note that even if DTIs are introduced, different lenders may have different DTI requirements.

So, it’s always best to seek guidance from a mortgage adviser as they will understand the criteria for mortgage borrowing from specific lenders.

How Could A DTI Impact Investors?

Will DTIs apply to investors? The answer is, kind of.

There will be an investment class, as well as a non investment class for the DTI restriction. There is also an allowance for banks to work outside DTI rules for certain clients, as they have done with low deposit buyers.

So, how do you qualify for an exemption? Well, no one really knows at this point. It is likely that clients with a lot of equity (so, upwards of the current 40% minimum), clients with a larger portfolio of investment properties, or those that have proven borrowing (and servicing) power from a specific bank. [source]

As always, the best idea is to seek expert advice before making any moves. Don’t rule yourself out, as you may be surprised by what could be possible with the right strategy.

What’s Been Happening This Month

Mortgage Rates Exceed Stress Tests

If your mortgage is about to come up for renewal, you might be feeling the pinch right now. Here’s why:

In May’s Financial Stability Report, the Reserve Bank found households that borrowed during the period of very low interest rates between late-2020 and late-2021 (when the market was running hottest) were stress-tested at rates below what they are today.

“Therefore, some of these borrowers and other borrowers with high debt-to-income levels may begin to struggle to meet their repayment obligations as they reprice onto the higher rates,” the report read. [source]

What does it mean? Well, if you are earning at the same rate you were when you borrowed and you’ve recently refixed your mortgage rates, the repayment amounts could be higher than what your income was tested for.

So, if you are worried about meeting these repayments, it’s time to have a chat with the team here at Mortgage Suite so that we can explore whether your current loan structure is the best fit for you still. Get in touch with us now for an obligation free chat.

Property Market Slows Right Down

Winter usually causes the property market to slow, but it seems winter has come early this year. Barfoot & Thompson have reported that Auckland house sales are at a 22 year low. The sales decline was 38.2% down on March and the median sale price was down 2.9% at $995,000. It’s the first time in 16 months that the median sales price has fallen below $1 million. [source]

But, the market slump is not only confined to Auckland. Average home values are down by $114,600 nationally. So, what does it all mean?

Well, if you are selling, you will need to be realistic about your price expectations. However, if you are looking to buy, there are some excellent bargains to be had. Before you make any decisions, the best option is to speak with a financial adviser to see what is possible for your situation.

Is Now A Good Time To Buy?

The market is slowing and interest rates are still high, is now really a good time to buy your first home? Well, any time can be a good time to buy if you understand what is happening in the market.

Yes, interest rates are much higher than they were even a year ago. But, the property market is slow, so there are some good bargains to be had and less competition, especially at the lower end of the market. And, there is great government support to allow first home buyers to secure mortgages.

Property is seen as a good investment here in NZ, as the values generally trend upwards in the long term. So, investing in property now will get you on the ladder and could yield good capital gains in the future.

Where Are Interest Rates Heading?

At a recent Kiwibank function, its economist boldly predicted that interest rates will start to fall around November this year. His view is that Inflation has peaked, tourism is back at pre-covid levels and there will be a drop in wholesale markets.

He believes that the Reserve Bank is likely to increase the OCR at the next review only to prevent later regrets, but that will be the last of the increase. He waged a bottle of whiskey on this…😃

As always, before making any moves in the market, the best thing is to understand your own financial situation and what is possible. Whether you’re a first home buyer, looking to refix your mortgage rates, or considering investing in property, we can provide you with the trusted, expert advice you need. So, get in touch with the Mortgage Suite team today.