Debt-to-income framework to be finalised by end of year, restrictions could be introduced by mid-2023 if needed

The framework for debt-to-income ratios will be finalised by late 2022 and could be introduced by mid-next year if required, the Reserve Bank has confirmed. 

DTI ratios, as they're known in the mortgage industry, are calculated by dividing all of your monthly financial obligations by your total income. The figure is known as your DTI, and if restrictions were introduced, it must fall under a certain number to qualify for a mortgage. 

In 2021 Finance Minister Grant Robertson agreed "in principle" to allow the Reserve Bank to implement DTIs but only after full public consultation. Robertson also said  DTIs shouldn't impact first-home buyers and should only apply to investors. 

On Wednesday Deputy Governor and general manager of financial stability, Christian Hawkesby said after consultation with industry and community groups the Reserve Bank was forging ahead with the DTI framework.

"We received a good mix of submissions from banks, industry and community groups, and members of the public... Following consideration of the submissions, we intend to proceed with designing a framework for operationalising DTI restrictions, in consultation with the industry and other stakeholders," Hawkesby said. 

"Our modelling indicates that first-home buyers would be the least impacted by a DTI restriction, with investors impacted the most as they tend to borrow at higher DTIs than other groups on average. 

"This aligns with our Memorandum of Understanding with the Minister of Finance on macroprudential policy which states that in designing DSRs, we will have regard to avoiding negative impacts, as much as possible, on first-home buyers. Additionally, the use of speed limits and exemptions can further mitigate any negative long term impacts on first-home buyers."

But Hawkesby said given new lending regulations and harsher tax rules for investors, DTIs aren't currently needed urgently. 

"Banks' test interest rates have begun to rise in line with market rates, and we expect to see a slowdown in high-DTI lending over the coming months. "The new CCCFA regulations, changes to the tax treatment of investment property, and tighter LVR restrictions on owner-occupiers are also having an impact on the availability of mortgage credit. 

"We therefore do not see an urgent need to impose an interim test rate floor at this stage, but we are monitoring the situation closely and do not rule out this option if there is a resurgence of risky lending in the housing market.

It comes as the housing market finally appears to be cooling after spiking during the COVID-19 pandemic. 

CoreLogic's quarterly property market and economic update, released on Wednesday, revealed the weakest volume of property sales in a decade.

Chief property economist Kelvin Davidson said higher mortgage rates and reduced credit availability is having a significant impact on the market.