RBNZ to design debt-to-income restrictions

The framework for debt serviceability restrictions on residential mortgage lending will be finalised by late 2022

RBNZ to design debt-to-income restrictions

In response to feedback received on its proposed policy for debt serviceability restrictions (DSRs) on residential mortgage lending, the Reserve Bank of New Zealand said it will design a framework for operationalising debt-to-income (DTI) restrictions.

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In November last year, RBNZ sought feedback on the merits and potential design of two types of DSRs, one of which is the restrictions on DTI ratios, which impose a cap on debt as a multiple of income.

The DSR consultation closed on Feb. 28.

“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,” said Christian Hawkesby, deputy governor and general manager of financial stability. “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.”

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Hawkesby said the central bank intends to have the framework finalised by late 2022, so that restrictions could be introduced by mid-2023 if required.

RBNZ was also considering a floor on the test interest rates that banks use in their serviceability assessments. It said those rates have begun to rise in line with market rates, and that other factors impact the availability of 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,” Hawkesby said.