Last month, the Reserve Bank of New Zealand released detailed information on the Debt-to-Income (DTI) ratio restriction framework. Although it is not yet confirmed whether or when it will be implemented, once this restriction tool takes effect, it will greatly limit the borrowing capacity of property investors. Therefore, it is necessary for us to understand this policy early on and make appropriate preparations.

Firstly, we need to understand what DTI is. DTI refers to the ratio of debt to income and is a tool used by the central bank to regulate financial risks and maintain financial stability. For example, if the set DTI multiple is 7 and your annual household income is $120,000, then you can only borrow up to 7 times your income, which is $840,000. If you already have a loan of $500,000, then the additional amount you can borrow will be only $340,000. Of course, this is a simplified example, and the specific multiples, income, and cost definitions need further policy refinement.

Firstly, from this example, it can be seen that DTI restrictions will greatly limit the amount you can borrow again, thereby affecting your investment plans. To cope with this impact, we can take immediate action and purchase the property you plan to buy as soon as possible. With interest rates currently having little room for significant increases, people's concerns about rising interest rates have diminished. Coupled with an increase in net migration and the relaxation of loan-to-value ratio limits, the real estate market may start to pick up. Now is a good opportunity to buy a property and effectively avoid further restrictions on your loans due to DTI.

Secondly, if you already have a loan and own two or more properties mortgaged with the same bank, and plan to sell one of them in the future, the implementation of DTI is likely to require you to use the entire sales proceeds to repay the loan and not be able to retain any cash.

For example, suppose you have two properties with loans of $300,000 and $500,000 respectively at Bank A. When you plan to sell the property with a loan of $300,000, the bank will reassess your borrowing capacity based on the current policy. Due to the new requirements of DTI, if your borrowing capacity is only $200,000, then after selling the property, you not only need to repay the $300,000 loan for that property but also repay $300,000 from the $500,000 loan until it does not exceed your existing borrowing capacity of $200,000. Many people may not be aware of this.

Therefore, we need to separate the properties mortgaged together as soon as possible. When multiple properties are mortgaged to the same bank, the loans are treated as a whole. When you sell a property, the bank will reassess the amount of loan you can retain. If the requirements cannot be met, such as being restricted by DTI, you may be required to use the entire sales proceeds to repay the loan without being able to retain any cash. Separating the properties also has another advantage, which is no longer being limited to the loan restrictions of a single bank, and you can consider options from other banks.

Furthermore, if your current loan is on an interest-only repayment basis and you plan to extend the interest-only period, it may not be possible to extend it after the implementation of DTI. As we mentioned in a previous video, the extension of interest-only loans is subject to reassessment. Once the DTI policy is implemented, it may be more difficult to extend the period. If it is possible to apply for an extension under the current policy, it is advisable to apply for a 5-year interest-only loan now to ensure cash flow in the coming years. This is especially important in the context of rising interest rates and living expenses, where the significance of interest-only repayments to cash flow is self-evident.

In summary, we recommend consulting your mortgage advisor as soon as possible or contacting us to help you to analyze and provide the most professional loan advice. Missing the opportunity to improve your loan structure now may mean missing it altogether.

We hope today's content has been given you some helpful insight, and we will provide specific advice based on your situation. If you need our assistance, please feel free to call us and let us conduct a comprehensive review for you.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.