DTI’s - What are they and what impact will they have?
So far in 2021, the government have announced a wave of policy and potential policy changes, aimed at cooling down the runaway housing market and in their own words, “tilting it more in favour of first home buyers”.
The latest shot fired by Finance Minister Grant Robertson has been adding DTI’s (debt to income ratios) to the Reserve Bank’s arsenal – giving them the ability to implement them if they wish to.
But what are DTI’s and what impact will that have on both first home buyers and investors, and will it make all that much of an impact in slowing down the market?
WHAT IS A DTI?
A DTI or debt to income ratio is a ratio that allows you to only borrow a certain amount times your income level. So say for example, your household income is $100,000 per year and the Reserve Bank implements a DTI ratio of four, then you can only borrow a maximum of $400,000.
There is also another way this can be implemented and this is based on a percentage of the cost of the debt against your income. So if the maximum percentage was 20% then on an income of $100,000 you could not take out a mortgage that cost you more than $20,000 per year.
WHAT IMPACT WILL THIS HAVE?
Whichever option the Reserve Bank chooses or whether they will use DTI’s at all is yet to be seen, but given everything else the government has thrown at the housing market has failed to stop its upward climb you wouldn’t rule it out.
If they choose the second option of a percentage cost against your income, then by making slight changes to interest rates (and therefore increasing the cost of borrowing) this could very quickly bring down the amount that people have the ability to borrow.
For first home buyers at the lower end of the market in smaller regional centres, the impact won’t be as great, however the higher the price bracket you are shopping in, the more impact DTI’s will have.
The Government and Reserve Bank have tried to reassure first home buyers that they will be working together to ensure there is a minimal impact on first home buyers, as after all, this is the demographic that they are trying to help into the market. The reality, however, is to do this there will need to be a raft of exemptions, which will make the policy more complicated.
Investors have been in the bullseye of most of the policy measures so far and with DTI’s aimed at them things could get tougher. The combination of DTI’s and the additional rules around interest deductibility will set the bar higher in terms of returns an investor will be seeking to make the purchase worthwhile and they will also require more money up front to make a get the deal over the line.
For those already in the market, the DTI’s won’t have a huge effect on current borrowing but could put on ice future plans to buy an investment property or a second home.
Only time will tell what happens and how the DTI’s will be implemented by the Reserve Bank. Watch this space and we will keep you up to date with any changes. For any further information on how this might impact your situation, give us a call on 03 441 1307