01/02/2024
February 2024
The Mortgage Lounge :- Mortgage Matters
The Debt-to-Income ratio (DTI) has become a focal point of discussions, particularly following recent consultation paper published by the Reserve Bank of New Zealand (RBNZ). The RBNZ is proposing to introduce debt-to-income (DTI) restrictions which would limit the amount banks could lend to owners-occupiers and investors seeking debt.
Having two decades of experience in the finance and mortgage industry, I offer my perspective on this matter.
Debt-to-income (DTI) ratio is a measure of how much debt you have compared to your income. If a lender restricts your borrowing to a DTI of five, it means you may be able to borrow twice your income. So if you earn $70,000 (gross), you may be able to borrow $350,000. The RBNZ has proposed allowing banks to lend up to 20% of residential loans to owner-occupiers with a DTI greater than 6 and to investors with a DTI greater than 7. The DTI measure is aimed at ensuring that borrowers are not over-leveraged and can service their loans even if interest rates rise. The consultation process for the DTI framework closes on March 12, 2024 12.
1: Canstar 2: Reserve Bank of New Zealand
In my extensive tenure in the field, I've observed instances where banks had to resort to the forced sale of properties (commonly called ‘mortgagee sale’) due to customers being unable to repay the money owed to the bank. It prompts us to question whether the lending decisions were misguided or if underlying changed client circumstances led to these outcomes. In my assessment, rare are the instances where loans turn bad solely because financial institutions made erroneous judgments during the lending process. Banks and financial institutions typically employ robust mechanisms to safeguard their decisions, ensuring a meticulous review of every detail.
More often than not, the challenges arise from life's unpredictable events, what I refer to as the three "D"s:
Divorce, Death, Disability, additionally, unforeseen circumstances such as job loss or health issues can compel individuals to liquidate their assets.
Rather than heavily relying on the DTI ratio, which could unintentionally affect first-time homebuyers or investors, I suggest focusing on assessing borrowers through the three "C"s: Capacity, Character, and Collateral.
This comprehensive approach can offer a more detailed understanding of an individual's financial standing, promoting fair and equitable lending practices.
Home buyers :
I consistently advise customers to demonstrate both financial capacity and character. Here's a practical approach: If your current rent is $600 per week, and you can save an additional $400 weekly, totalling $1000 in rent + savings, this is equivalent to loan repayments of $556,500 at the current variable rate of 8.64% per annum which is normally higher than the fixed interest rate. Achieving this while maintaining a positive account conduct, managing daily living expenses, and having room for emergency savings effectively showcases your overall financial capacity and character to lenders. Moreover, if you have an existing flatmate willing to relocate with you, it can further strengthen your loan application. Various other factors will also play a crucial role when lenders assess your application.
If you are contemplating buying your first home or considering it in the near future, feel free to contact Mahesh Amrute at 0274 624 374 or email [email protected] for an initial, up to one-hour free one-on-one consultation.
Mahesh Amrute is a financial adviser who gives financial advice through Ambadnya Financial Solutions Limited trading as The Mortgage Lounge.
www.mortgagelounge.co.nz
