Debt-to-Income Ratios: What NZ Lenders Are Looking For
When you apply for a mortgage in New Zealand, lenders look at many factors to assess whether you can comfortably meet your repayments. One measure that has grown in prominence is the debt-to-income ratio, commonly referred to as DTI. The Reserve Bank of New Zealand introduced DTI restrictions as part of its macroprudential toolkit, meaning lenders are now subject to rules about how many high-DTI loans they can write. Understanding what DTI means and where you sit can help you approach your application with a clearer picture.
What Is a Debt-to-Income Ratio?
Your debt-to-income ratio is calculated by dividing your total debt by your gross annual income. Total debt includes the new mortgage you are applying for, plus any existing debt such as personal loans, car finance, student loans, and credit card limits. Gross income is your income before tax, and where multiple borrowers are involved, both incomes and all debts are combined.
As an example, if two borrowers have a combined gross income of $140,000 and are seeking a mortgage of $700,000 with no other debts, their DTI would be 5. If they also carried $50,000 in other debt, the DTI would rise to approximately 5.36. Lenders and the RBNZ use this ratio as a high-level indicator of whether a borrower is taking on too much debt relative to the income available to service it.
RBNZ Restrictions and What They Mean in Practice
Under the RBNZ's DTI framework, lenders are required to limit the proportion of new lending they extend to borrowers above certain DTI thresholds. For owner-occupiers, a DTI of 6 is the current threshold above which lending is restricted, and for investors the threshold is 7. This does not mean borrowing above these thresholds is impossible, but lenders must stay within defined limits on how much of their new lending can exceed them.
In practical terms, this means that if your DTI sits comfortably below the threshold, your application is less constrained by this particular rule. If your DTI is close to or above the threshold, some lenders may be more cautious, and it is worth understanding the picture clearly before you apply. Lenders can still approve some lending above the threshold within their allowable limits, but the appetite for doing so varies across institutions.
Reducing Your DTI Before Applying
There are a few ways borrowers commonly consider improving their DTI before applying for a mortgage. Paying down existing debt, particularly high-balance personal loans or credit cards, reduces the total debt figure in the calculation. Increasing income, whether through a pay rise, a second income stream, or recognising income that was previously underdeclared, raises the denominator and improves the ratio.
It is also worth noting that credit card limits count as debt in many lenders' calculations, regardless of whether you carry a balance. Reducing credit card limits you do not actually need can lower your total debt figure without requiring you to pay anything off. This is a detail that many borrowers overlook when preparing an application.
- DTI is total debt divided by gross annual income, with all borrowers and debts combined
- The RBNZ restricts high-DTI lending: the owner-occupier threshold is currently 6, and 7 for investors
- Paying down existing debt or reducing credit card limits can improve your DTI before you apply
- Lenders can approve some lending above DTI thresholds within their regulated limits
- How lenders treat different types of debt in the calculation can vary - worth checking early
DTI is one of several financial health indicators lenders consider alongside loan-to-value ratio, serviceability testing, and credit history. At Chaperone, a mortgage adviser can help you calculate where your DTI currently sits and identify whether there are practical steps worth taking before you formally apply.