DTI Restrictions: What They Mean for Client Applications

New Zealand's Reserve Bank introduced debt-to-income ratio restrictions as a formal macroprudential tool, placing a cap on the share of high-DTI lending that banks can originate. For many borrowers, DTI limits do not create a meaningful additional constraint on top of existing servicing tests. But for a proportion of clients, particularly those with higher incomes buying in expensive markets or those with existing debt, understanding how DTI is calculated and where the limits apply is increasingly relevant. At Chaperone, we help advisers build a solid working understanding of DTI so they can accurately assess client eligibility and communicate clearly about what the restrictions mean in practice.

How DTI Is Calculated

The debt-to-income ratio is calculated by dividing the total debt a borrower would carry after the new mortgage is in place by their gross annual income. Total debt includes the new mortgage, any existing mortgages, and potentially other debt obligations depending on how the lender defines the calculation. Gross income includes all income sources the lender is willing to recognise for servicing purposes. The resulting number, for example a DTI of 6, means the borrower's total debt is six times their annual gross income. The RBNZ's framework sets limits on what proportion of a bank's new residential mortgage lending can go to borrowers above certain DTI thresholds, with different limits applying to owner-occupiers and investors.

Where the Limits Apply

Under the current framework, the DTI restrictions create a speed limit on high-DTI lending rather than a hard ban. Banks are permitted to do some lending above the DTI threshold, up to a defined proportion of their total new lending flow. This means that a borrower above the DTI threshold is not automatically ineligible; they may still be approved if the lender has remaining capacity in that bucket. However, lenders typically reserve this discretionary capacity for their strongest applications, meaning a borrower who is above the DTI threshold and also has other risk factors is less likely to use up that capacity than one whose only complexity is the DTI. Understanding this distinction helps advisers set realistic expectations and prepare applications that make the strongest possible case for a client who is above the threshold.

Interaction with Servicing Tests

It is important to understand that DTI restrictions operate alongside, not instead of, the existing servicing assessment. A client can pass the DTI test and still fail servicing if their income does not generate sufficient surplus after meeting the stress-tested repayments. Conversely, a client who comfortably services the debt may still be constrained by the DTI cap. For some clients, particularly high-income earners in expensive markets, the binding constraint is DTI. For others, particularly those with lower incomes or complex income structures, the binding constraint is servicing. Advisers who can identify which constraint is operative for a given client are better positioned to offer clear guidance about what is achievable and what, if anything, could improve the position.

Strategies for Clients Near the Threshold

For clients who are close to but not clearly above the DTI threshold, a few factors can influence whether they remain within it. Reducing other debt before application, for example paying down a personal loan or reducing a credit card limit, lowers the total debt figure and can move a borderline client below the threshold. Including all eligible income sources in the calculation can also improve the ratio if a client has income streams that might otherwise be omitted. For clients who are clearly above the DTI threshold and cannot easily change their position, understanding which lenders have more remaining capacity in their high-DTI bucket, and ensuring the application is as strong as possible in other respects, is the most practical approach. At Chaperone, we see this as an area where deep lender knowledge genuinely differentiates advisers.

Explaining DTI to Clients

DTI is a relatively new concept for most New Zealand borrowers, and it requires careful explanation to avoid confusion with servicing tests. Many clients conflate the two, assuming that because they can afford the repayments their borrowing capacity is unlimited. Explaining that DTI is a separate measure, one that looks at the stock of debt relative to income rather than the flow of repayments relative to cash flow, and that it applies as an additional constraint, helps clients understand why their maximum borrowing may be lower than their servicing capacity alone would suggest. This conversation is easier when it happens early, before a client has anchored on a borrowing figure based solely on their repayment capacity.

Staying Current as the Framework Evolves

The DTI framework is relatively new and may be adjusted as the RBNZ assesses its effect on the market. Advisers who stay current with changes to the thresholds, lender proportions, or income and debt definitions are better placed to give accurate, timely guidance to clients.