On Tuesday the Reserve Bank announced that an MoU (Memorandum of Understanding) has been signed with the Minister of Finance regarding a macro-prudential policy. What this means is that along with the tightening of the responsible lending rules that have been introduced with the CCCFA (Consumer Credit Contracts Finance Act), the banks will need to be assessing the borrower’s debt to income ratio (DTI). This tool will ensure that the banks check that you have sufficient income to service the debt. This is so that you, the borrower, are resilient if the property value drops.
“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage,” says Mr Bascand from RBNZ.
“We’ve already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”
More information is to come, and some banks already have these tests in place and are using the tests to limit borrowing to certain clients. Some investors may find themselves “rent reliant” and not able to get further finance.