We explore the potential impact on mortgage lending, particularly for residential property investors seeking loans.
The Reserve Bank is planning to announce its final decision in June and then implement these as soon as possible. I personally believe it wants to get these in place while interest rates are still high, as, at present, the current way banks assess loan affordability is likely to be more stringent than how the debt-to-income formula will initially be applied. What will happen instead at a certain point is that as interest rates drop, rather than the normal situation where mortgage borrowers' capacity to access credit increases, the new rule will prevent borrowing or at least limit credit for many applicants.
The New Zealand Banking Association (NZBA) has released their submission and, in my opinion, has raised some valid points, including:
- Questions around whether the introduction of this rule may cause bias towards high income earners since the rule focuses on income and not expenses.
- If the implementation of the rule may unintentionally affect small businesses as many businesses in this sector have their business debt tied to the owner's residential property.
- Further public clarification is required regarding banks not being able to use forecasted or projected income when calculating business income (this must always be based on historical data).
- The Government is looking to make changes which are likely to be loosening of criteria in regard to the CCCFA (this was the act which caused nightmares for many borrowers across 2022 and into 2023) at the same time that the Reserve Bank introduces the DTI restrictions. The Reserve Bank needs to keep in mind the confusion that these two points heading in opposite directions is likely to cause.
- They believe that the speed limits (the percentage of lending that the banks can do outside the prescribed multipliers) should be higher for both first home buyers (they recommend 25% versus the RBNZ's 20% and 30% versus 20% for property investors.
While we await updates, it's a great opportunity for mortgage borrowers to gain a clearer understanding of the potential impact these upcoming changes might have on their own financial journey. If you're curious or have questions about what this means for you, I'm here to help. Feel free to reach out at kris@krispedersen.co.nz for a friendly, no-obligation chat.
