Curbing the housing market is a hot topic for politicians, with the election now just weeks away.
The Reserve Bank was in the headlines last week with its suggestion of implementing Debt-to-Income (DTI) ratios as another tool to help calm what has been a heated housing market. The Government has ruled out implementing DTI ratios and has also sent a signal to the Reserve Bank that they should consider ending Loan-to-Value Ratios. This is because house prices are flat or dropping in other cities and towns across New Zealand, despite the buoyant local market in Kapiti.
This is a sensible approach from the Government, particularly given that banks are already strict on their lending and debt servicing criteria, and people aren’t able to borrow as much as what they might have a year or two ago. Often banks use a servicing buffer which can include using an interest rate well over 7% in their calculations of what is affordable.
In discussing the potential for a DTI ratio, the Reserve Bank’s primary concern was protecting lenders against a rise in interest rates (which were at 8% ten years ago), or financial distress like losing employment that can affect your ability to pay the mortgage. This is because the more you owe, the less you are able to soak up any increase in payments.
If you haven’t done it yet, it’s quite simple to work out your DTI ratio - you just need to take your total debt figure (including mortgage, student loans, car loans, child support and credit card payments) and divide that by your total gross monthly income. At the moment with a 20% deposit banks will lend you around 5 times your gross annual income. Less if your deposit is under 20%.
It can, however, be difficult to define ‘income’ because what income means can vary from bank to bank—some people have multiple revenue streams including company and trust income. It’s even harder to estimate a DTI for a self-employed person because the business financials don’t always tell the full story—some income is not always verifiable from a tax perspective, for example, depreciation and home office expenses for a self-employed person can often be 'added back' into the income pot.
Working with a trusted mortgage adviser can help you cut through these complicated figures, and ensure you don’t over-commit on your lending capabilities. We have a unique relationship with banks—we can tell you what they’re thinking, why they do what they do and give you impartial advice on how to mitigate future risk—no matter what the market does.
Contact us for expert advice.