The Reserve Bank Framework for Debt to Income Restrictions
The Reserve Bank of New Zealand (RBNZ) has released its finalised framework for debt-to-income (DTI) restrictions. The framework sets out the technical specifications that banks need to comply with if a DTI tool is activated.
DTI restrictions are a macroprudential tool that can be used to limit the amount of debt that borrowers can take on relative to their income. This helps to protect the financial system from the risk of a housing-related financial crisis.
The RBNZ has not yet activated DTI restrictions, but the framework provides banks with clarity in terms of the definitions of debt and income and future data reporting requirements. This will allow banks to make any necessary changes to their internal systems and processes in preparation for the activation of DTI restrictions.
The DTI framework is based on the following principles:
Proportionality: The restrictions should be proportionate to the risks they are intended to address.
Transparency: The restrictions should be transparent and easy to understand.
Accountability: The restrictions should be accountable to the public.
The framework sets out a number of different DTI tools that the RBNZ could use. These tools include:
Single-borrower DTI limits: These limits would apply to the debt of individual borrowers, regardless of their household income.
Joint-borrower DTI limits: These limits would apply to the debt of borrowers who are jointly liable on a mortgage.
Income-growth-linked DTI limits: These limits would take into account the borrower's expected income growth.
The RBNZ will decide which DTI tool to use, and the level of the limits, based on a number of factors, including the state of the housing market and the level of financial risk.
The finalised DTI framework is a significant development in the RBNZ's macroprudential toolkit. It provides banks with clarity about the future use of DTI restrictions, and it will help to protect the financial system from the risk of a housing-related financial crisis.
What does this mean for borrowers?
The activation of DTI restrictions could have a number of implications for borrowers. For example, it could make it more difficult to borrow money, or it could result in higher interest rates. However, the impact of DTI restrictions will depend on a number of factors, including the level of the limits and the state of the housing market.
It is important to note that the RBNZ has not yet activated DTI restrictions, and it is not clear when or if they will be activated. However, the finalised framework provides borrowers with an indication of what to expect in the future.
What can borrowers do to prepare?
Borrowers who are concerned about the potential impact of DTI restrictions can take a number of steps to prepare. For example, they can:
Improve their financial situation: This could involve paying down debt, increasing their savings, or getting a higher-paying job.
Get pre-approved for a mortgage: This will give borrowers an indication of how much they can borrow before DTI restrictions are activated.
Be aware of the options available to them: If DTI restrictions are activated, borrowers may need to consider alternative ways to finance their home purchase.
The activation of DTI restrictions could have a significant impact on the housing market. However, borrowers who are prepared can minimize the impact on their financial situation.