The RBNZ plans public consultation on potential debt-to-income (DTI) settings in the first quarter of next year, with a possible introduction mid next year.

While the central bank is coy on whether it will actually introduce them or not, they are intended to set limits on the amount of mortgage debt borrowers can take on relative to their income.

According to the RBNZ this will support financial stability by limiting higher-risk mortgage lending, thus reducing the likelihood of a future housing-related financial crisis.

First given the green light by former Labour Finance Minister Grant Robertson in 2021, RBNZ’s work has continued on developing a DTI framework to complement the existing LVR policy by focusing on a different dimension of risk.

This year banks have been working on developing reporting and management systems so DTI restrictions can be implemented by April.

Simple framework

However, RBNZ Deputy Governor Christian Hawkesby says no decision had been made on whether a DTI ratio rule will be put in place, even though preparatory work has been done.

Stakeholders are said to be generally supportive of the proposed design of the DTI framework and agreed with the RBNZ’s overall approach to keep the framework simple and clear, which includes treatment of personal debt in DTI calculations, the calculation of business income, and the treatment of complex lending situations.

The DTI framework is intended to be complementary to LVR policy and in the RBNZ’s latest Financial Stability Report the country’s five big banks say there has been demand from borrowers for lending at the revised LVR speed limits and thresholds, although the impact of the policy easing on overall mortgage lending volumes has been marginal.

Defaults worry

But the RBNZ is warning mortgage and loan defaults are expected to continue to rise for households and businesses in the existing economic climate.

The Financial Stability Report says indicators suggest financial stress will continue to rise.

Consumer and business confidence remains weak, reflecting increased debt servicing burdens and the weaker outlook for the economy.

Consumption is expected to decline as household budgets continue to tighten. A range of forward-looking indicators, such as measures of confidence and negative news sentiment, suggests continued weakening in loan performance in the short-to-medium term.