DTI and LVR restrictions explained

17 Jun 2024 The Lodge Real Estate Team

Property Investment

Debt-to-income ratio changes

The Reserve Bank looks likely to bring in debt-to-income (DTI) ratios later this year. DTI ratios link your income to how much you can borrow to purchase property, and while banks currently use a version of this to decide on lending now, it is set to become a bit tighter.

The plans are for lending to be restricted to 6x your income for an owner-occupier, and 7x your income if you’re a property investor. 

Put simply, this means if your household income is $100,000, you would be able to borrow up to $600,000. If you’re a landlord looking to buy another investment property, you need to add any rental income you would receive on top of your normal salary. So, say you collect $30,000 in rent a year, and your salary is $100,000, you would multiply $130,000 by 7 to get your borrowing figure of $910,000.

Determining your DTI ratio as an investor starts to get more complex if you already have other mortgages you’re paying off (such as your own home and any other investment properties you own). This debt, plus any other debt such as credit cards and student loans, then needs to become part of the equation, as well as the gross yield of the property you intend to buy. Rather than make assumptions here, we’d recommend getting in touch with your mortgage adviser to work out what you can borrow under these new rules.

Will the new DTI ratio drive up property prices? Not immediately. Banks are already allowed to approve up to 20% of mortgage lending outside of these rules, and while some investors could get a high DTI loan currently, they’re likely put off by the current interest rate to want to borrow a lot of money, and without that demand in the market prices will be slow to rise.

Loan-to-value restriction changes will impact investors and first home buyers

Loan-to-value (LVR) restrictions are also set to tighten which will lower the amount of deposit needed to buy an investment property. LVR measures the amount of debt a property has compared to its market worth, and the LVR restriction is where banks can only lend within a particular LVR. Currently it’s 80% for owner-occupiers and 60% or less for investors.

Under the new rules, the amount of deposit you need to buy a house will change depending on if you are buying a new or existing house, or if you are buying as an investor. Right now, home buyers need 20%, although some lenders let them in with just 10%, and investors need 35% to buy existing property, with 20% for a new build. 

The Reserve Bank has indicated that once the new DTI rules are in place, the LVR rules will also change, and investors will only need a 30% deposit (instead of 35%). Owner-occupiers will need a minimum of 20% (so, no more 10% home loans). 

These restrictions will no doubt impact owner-occupiers, and particularly first home buyers, if their borrowing power is restricted to being able to borrow only 80% of the home’s value. For example, if there were no LVR restrictions in place, a $100,000 deposit could enable lending for a property up to $1,000,000. With LVR restrictions in place, it would only enable lending for a house worth $500,000. Depending on where you live, how many homes do you know of going for that price? 

This may result in more renters, which is good news for landlords, but it will effectively knock the wind out of first home buyers’ sails, especially with the removal of the Government’s First Home Buyer grant.

It is worth noting the DTI and LVR restrictions don’t apply to new builds. 

And what about the Brightline Test?

Changes to the Brightline Test will bed in from 1 July 2024, meaning properties sold on or after this date will only be subject to the Brightline rule (i.e. capital gains tax) if the property is sold again within two years.

First introduced in 2015 at two years, under the last Labour government the Brightline Test rules were expanded to 10 years for properties bought on or after 27 March 2021, or five years for new builds, to stem property ‘flipping’ which was seen as pushing first home buyers further out of the market.

This will be good news for those who bought during the peak of the market when interest rates were at their lowest and now want to exit the market after feeling the burn from high interest rates for too long. 

It seems like there’s been a lot of change this year – because there has! Here’s to a potentially more settled latter half of 2024. 

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