When considering a home loan or 'mortgage’, understanding how lenders assess your ability to repay is vital. One key tool they use is the debt-to-income (DTI) ratio - a financial measurement that shapes your borrowing power and influences the terms you’ll be offered.
Whether you’re eyeing an existing home or seeking a brand-new build, knowing how DTI work can help you prepare, make sound decisions, and improve your chances of securing finance.
What Is Debt-to-Income Ratio?
The debt-to-income ratio is a calculation that compares your total debt to your gross annual (before-tax) income. It’s a straightforward measure: your total borrowings divided by your household income. Lenders use this ratio to gauge whether you’re likely to repay a mortgage without overextending your finances.
New Zealand’s approach focuses on a simple multiplier. For example, a DTI of 6 means your total debt is six times your yearly wage.
How DTI Is Calculated:
DTI Ratio = Total Debt / Gross Annual Income
- Total Debt: Usually includes all home loans, and sometimes other lending such as personal loans and credit cards.
- Gross Annual Income: The combined before-tax income of everyone on the application.
If your household brings in $120,000 per year and you’re looking to borrow $600,000, your DTI would be 5.
Why Does DTI Matter for Borrowers and Lenders?
In New Zealand, the Reserve Bank and major lenders have placed growing emphasis on the DTI ratio as a measure of responsible borrowing. As house prices have risen, DTI ratio has become a critical benchmark to ensure borrowers aren’t taking on levels of debt that could put them at risk if interest rates rise or if their circumstances change.
Traditionally, New Zealand banks considered a range of factors like your deposit size, employment stability, expenses, and credit history. Increasingly, though, DTIs are shaping lending decisions, particularly for those seeking high loan amounts relative to their income.
Higher DTIs can signal greater risk to banks and may lead to a declined application or less favourable lending terms, such as requiring a bigger deposit or charging a higher interest rate.
DTI Rules for Existing vs. New Properties
A notable aspect of lending is that DTI limits can differ depending on whether you’re purchasing an existing property or building new.
Lending for Existing Properties:
In 2024, the Reserve Bank introduced new rules allowing it to set DTI restrictions for high-LVR (loan-to-value ratio) lending, particularly for existing residential properties. Lenders also have internal limits - commonly, a DTI of 6 or less is preferred for owner-occupiers and a DTI of 7 for investment properties. If you’re seeking a loan with a DTI over this threshold, approval becomes more challenging unless you have strong mitigating factors, like significant verified additional income, a large deposit, or other assets.
Lending for New Builds:
New builds are exempt from the Reserve Banks DTI regime and banks are more flexible for those purchasing new properties. To encourage new housing supply, they often allow higher DTIs for loans funding new builds. Lenders will consider DTIs of 7 or even higher for new property purchases, reflecting the government’s desire to boost housing construction. This increased allowance acknowledges that encouraging new builds supports broader housing affordability and supply.
What’s the Difference?
- Existing Properties: Stricter DTI caps, typically up to 6 for most borrowers.
- New Properties: More lenient DTI limits, frequently up to 7+, making it easier to borrow more if you’re contributing to the nation’s housing stock.
Practical Steps to Improve Your DTI
No matter what property you’re buying, a lower DTI will strengthen your application. Here’s how you can improve your ratio:
- Pay down short-term debts: Reducing credit cards or personal loans improves borrowing power.
- Increase your income: Combining household incomes, seeking a raise, or adding a side income all help.
- Avoid new debt before applying: New loans weaken your DTI and borrowing capacity.
- Consider your property type: If your DTI is edging above lender limits, looking at new build opportunities could provide you with greater flexibility.
The Takeaway
The debt-to-income ratio is now a central part of securing property finance in New Zealand. For would-be home buyers and investors, understanding DTI calculations and the different lender expectations for existing versus new properties will empower you to plan effectively, strengthen your application, and make informed decisions. Taking steps to improve your DTI can help secure better lending terms and set you up for sustainable home ownership, no matter where you are on your property journey.
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