WELLINGTON ― The Reserve Bank of New Zealand (RBNZ) has confirmed the activation of Debt-to-Income (DTI) restrictions and loosening of Loan-to-Value Ratio (LVR) restrictions at the settings that were consulted on earlier this year.

The new DTI restrictions will create limits on the amount of high-DTI lending that banks can make, which means the borrower has taken on a high amount of debt relative to their gross or pretax income, an RBNZ statement said on Tuesday.

LVR restrictions limit the amount of low-deposit lending that they can make, it said.

DTIs and LVRs are complementary "macroprudential policy tools," said RBNZ Deputy Governor Christian Hawkesby.

"LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing downturn, while DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt," Hawkesby said, adding both act as guardrails reducing the buildup of high-risk lending in the system.

Having both the DTI and LVR restrictions in place means the risks that they are designed for are better focused, while achieving the same or better overall level of resilience in the financial system, he said, adding activating DTIs means that LVR settings can be eased, too.

The DTI restrictions include allowing banks to do 20 percent of their lending outside the specified limits, which will improve efficiency by letting banks exercise their discretion and manage complex cases, Hawkesby said.

Banks will need to comply with the new DTI and LVR restrictions from July 1, 2024, which will apply to new lending for residential properties in New Zealand, for both owner-occupiers and investors, according to RBNZ.

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