Understanding debt to income ratios
Debt to income ratio (DTI) is the amount of your debt compared to your income. It shows how many more times your debt is, in relation to your total gross income.
For example, if you earn $100,000 and you have debts of $500,000, your DTI will be 5 ($500,000÷$100,000).
Meaning of debt
Debt is the total amount of all your loans that you are responsible for at the time you apply for a residential mortgage. It includes the residential mortgage you’re applying for, as well as personal loans such as credit cards, overdrafts, student loans, and other debt.
Meaning of income
Income is the total amount of money you earn before tax. It includes wages and salaries, self-employment income, rental income, business income, foreign income, government benefits, investment returns, and other income.
Calculating DTI
DTI is calculated by dividing your total debt by your total income.
For example, if you earn $100,000, have a student loan of $80,000, and are applying for a mortgage of $420,000, your DTI will be 5. ($80,000 + $420,000) ÷ $100,000 = 5
Debt to income restrictions
Reserve Bank of New Zealand (RBNZ) sets DTI restrictions, which banks then follow.
There are different DTI restrictions depending on whether you are a residential owner occupier or a residential property investor.
The DTI restrictions mean that we can only provide 20% of loans to:
- owner-occupied borrowers with a DTI greater than 6
- residential investors with a DTI greater than 7.
This means when we assess your application we’ll need to make sure we meet these restrictions.
You can see DTI examples on the RBNZ website, which show how the restrictions may impact borrowing.
How DTI restrictions impact existing home loan customers
Topping up an existing home loan
You can apply to borrow more funds on top of your existing home loan. We’ll assess your application to check that we can accommodate the new loan amount, and that your new DTI meets the restrictions.
Moving to a new home
If you’re moving to a new home, you should be able to take your home loan with you. If you plan to live in the new property, as your main place of residence, and you are not increasing your borrowing, you’re not likely to be affected by the DTI restrictions.
As long as you plan to live in the new property, as your main place of residence, you’re not likely to be affected by the DTI restrictions.
If you’re wanting to increase your total home loan amount, your DTI will be recalculated based on the new loan amount. When we assess your application we’ll need to make sure we meet the DTI restrictions.
DTI exemptions
Under some circumstances there are exemptions to DTI restrictions. Where a loan falls under an exemption, the loan is not included in the banks’ 20% lending quota.
Exemptions may apply in certain situations, for example if you are refinancing from another bank, or lending (increasing of existing loans) to finance the build of a new house or apartment.