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Yes, a few key updates to the residential property market kick in on Monday and here I discuss what these are and how they may impact you. We also explore how these 1st July changes by the Reserve Bank of NZ (RBNZ) and the Government present opportunities as well.

Key Takeaways:

  • Debt-to-Income (DTI) ratios set at 6: Ensuring manageable and sustainable borrowing limits for homeowners.
  • More flexible Loan-to-Value Ratio (LVR) restrictions: Providing greater accessibility to mortgage options by relaxing the LVR requirements.
  • Bright-line test period reduced to 2 years: Shortening the period for capital gains tax on property sales, making property investment more attractive.

Firstly, what are the changes?

Starting 1st July, the RBNZ has officially introduced Debt To Income ratios (known as DTIs) on one hand and loosened the Loan to Value ratios (LVR) that restrict Banks on the other. The Government’s decision to reduce the brightline test to 2 years for all properties (after the previous Government has increased it to 10 years) also kicks in.

Let’s look at these “DTIs”. These changes have been signaled for a long time now. However come July 1st it’s now official, DTIs are here. What this means is lenders will be required to calculate a borrower’s DTI by taking the total debt and dividing it by total gross income.

The ratio that has been decided by the central bank is a maximum DTI of 6.

While this may seem restrictive, it’s important to note in the background lenders have already been reviewing a borrower’s DTI and what’s more, with interest rates presently at their current levels, often a person’s affordability to borrow is impacted by the cost of higher interest rates before the DTI of 6 factor comes into play.

Where things may change in the future is when interest rates fall in NZ and loan affordability improves; at that future time the DTI of 6 threshold will start to play a role.

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So with DTIs potentially restricting borrowing down the track, how does the loosening of the LVRs help?

Good question. Essentially the RBNZ has decided to increase how much lending each bank can provide owner occupied borrowers with less than 20% deposit and investors above the permitted maximum LVR. For example, the LVRs have been loosened to now allow 20% of bank lending for owner occupiers over 80% LVR, and 5% of investor lending to investors over 70% LVR.

What this means for a first home buyer is more funds becoming available at each bank to lend to you without the need for a 20% deposit. Similarly, property investors can now borrow with only 30% deposit, down from 35% required prior to July 1st.

New Zealand July 1 Home Buying Rules

If you are a first home buyer or a property investor, July 1st signals a great time to explore your options with the possibility of borrowing funds becoming easier and more available.

The upshot of the ability for first home buyers and investors to secure more lending from the Banks is the increase in demand for properties, which in turn may have a positive effect on house prices.

It’s no coincidence that these changes are coming into force at the same time the Government’s decision to reduce the brightline measure from 10 years back down to 2 kicks in. Essentially, this means an investor who sells an investment property only needs to do so after 2 years instead of 10 years to help avoid the need to pay any capital gains tax. This is a significant positive change for existing investors and from 1st July it’s widely expected that additional properties purchased over 2 years ago will be listed for sale.

This is also positive for new purchasers, as the increase in real estate stock provides more options.

If you are a first home buyer or property investor and would like to discuss how these changes can support your property goals, get in touch with Custom Mortgages today for a personal, no-obligation discussion.

About the Author

Originally from Australia, James has called Central Otago home for the past 14 years. During this time, he has worked in banking & finance roles, most recently as the region’s Private Banker with Bank of New Zealand. James brings his extensive expertise in residential & business lending and is passionate about building strong relationships with his clients to help them achieve their financial goals. In his spare time, you’ll often find James enjoying the beautiful outdoors of Central Otago with his wife and daughter.