Debt to Income (DTIs), First Home Grant and LVR Changes Coming

The Government/Reserve Bank recently made some announcements with changes to the housing market sure to affect borrowers in various ways come 1 July.

The first change is the immediate removal of the First Home Grant. To be honest I could see this coming given how stretched the Government’s finances are. From what I see it’s not likely to have a major impact on First Home Buyers. In my experience maybe 1 in 10 borrowers are reliant on it to buy a home. For the rest it is a nice bonus that essentially helps towards the costs of purchasing.

House prices dropping recently also helps cushion the blow of the removal of the Grants. I think First Home Buyers are resilient and this won’t hold them back.

The other major change is the Reserve Bank introducing Debt to Income Ratios (DTIs). This will limit how much a bank can lend to borrowers. So, banks will be limited to 20% of their lending to be over 6 x gross income pa for owner occupied lending and 7 x gross income pa for investor lending. Meaning most of their lending will need to fit within these rules.

At the moment, given the high interest rates, borrowing power is barely 4-5 times annual gross income, so it’s unlikely to have an immediate impact on borrowers. But once interest rates start to drop, bank test rates drop and borrowers look to borrow more money, it could have more of an effect on limiting borrowing power and house prices.

Many will argue that the banks lend pretty conservatively at the best of times, so introducing these DTI tools is trying to fix a problem that isn’t there. This also creates a real administrative headache for banks/lenders and mortgage advisers due to the complexity of the rule and everyone’s income. Turnaround times are already very slow as we near implementation of the rules and no doubt things may get worse before they get better.

Now a key point here is that while a bank may be limited (mostly) to lending 6-7 times annual income, that doesn’t mean that is what your borrowing power is! There is a lot of complexity and factors that come into borrowing power and as mentioned, it’s around 4-5 times annual gross income, sometimes less depending on your age, debt, how many kids and expenses you have.

On the upside, the Reserve Bank has said Banks can now use 20% of their lending for low deposit lending (excluding the First Home Loan scheme) which is up from 15%. This should hopefully mean getting “pre-approved” is a little bit easier.

It also means a change for investors only needing a 30% deposit down from 35%. It’s unlikely this will invite more investors into the market given the high cost of interest rates, insurance and rates.  

If you have any questions or want to review your situation, please contact us craig@craigpopefinancial.co.nz