Debt to Income (DTI) Ratio Explained

 

LVR looks at your deposit. DTI looks at your income. Together, these two rules determine how much a bank will actually lend you, so it’s worth understanding both.

What DTI Means

Your debt to income ratio, or DTI, compares your total debt to your total income before tax. If you earn $150,000 a year and are looking to borrow $750,000, your DTI is 5, five times your income.

The Current Rules

Since July 2024, the Reserve Bank has restricted how much high-DTI lending banks can carry:

  • For owner-occupiers, no more than 20% of a bank’s new lending can go to borrowers with a DTI above 6 times income.
  • For investors, that threshold sits at 7 times income, within the same 20% allowance.

This 20% allowance is shared across all of a bank’s new lending nationwide, so the strongest applications tend to get priority for it.

Banks Do Have Room to Lend Outside These Ranges

A DTI above 6 is not an automatic decline. Banks are permitted to lend outside these thresholds, within the 20% allowance described above. A strong application, solid income history, a larger deposit, low existing debt, can still be approved above the standard DTI limits. This isn’t guaranteed, and availability varies by lender depending on how much of their allowance they have left at any given time, but it’s a genuine option worth discussing with an adviser who has visibility of which banks currently have headroom.

DTI Includes More Than the New Lending

Your DTI is calculated using all of your debt, not just the loan you’re applying for. This includes your new mortgage, any existing mortgages, car loans, personal loans, and credit card limits, whether or not those cards are currently in use. Reducing existing debt, such as paying off a car loan or closing an unused credit card, before applying can improve your DTI position.

DTI in Taranaki

DTI restrictions have the most impact in cities where house prices have risen well ahead of local incomes, such as Auckland, Wellington, and Queenstown. Average DTI levels in Taranaki typically sit below 4, comfortably under the 6 times threshold that applies to most owner-occupiers. For most Taranaki buyers, DTI restrictions are unlikely to be the limiting factor. Deposit size and day-to-day serviceability are more commonly what determines borrowing capacity here.

DTI and LVR Work Together

DTI does not replace deposit requirements, it applies alongside them. A bank will assess both. If your deposit supports borrowing $900,000 but your income only supports $750,000 under DTI, the DTI figure is the one that stands. Understanding both early in the process avoids surprises partway through an application.

Exemptions Worth Knowing About

Some types of lending fall outside the DTI rules altogether. Current Reserve Bank exemptions include:

  • Kāinga Ora loans, including First Home Loans
  • Refinancing, provided the new loan does not exceed the value of the original
  • Portability, where an existing home loan is transferred to a new property, including a change of bank, provided the new loan does not exceed the original
  • Bridging finance, the short-term loan used between selling one property and settling the next
  • Property remediation, for example, repairing a leaky home
  • Construction loans, whether building a new home or purchasing a newly built home from a developer within 6 months of completion

KiwiBuild previously appeared on this exemptions list, but the scheme has since wound down and is no longer a live exemption. If you’re considering a construction loan, a refinance, or a portability move, it’s worth checking whether your situation falls outside the DTI rules before assuming the standard limits apply.

Frequently Asked Questions

Is DTI a hard cap I can never go over? No. It functions as a limit on the proportion of a bank’s overall lending that can exceed the threshold, not an automatic decline for every application above it. Banks retain some capacity to lend above it for strong applications.

Does DTI include my partner’s income and debt if we’re buying together? Yes. DTI is calculated using the combined income and combined debt of everyone on the application.

Are DTI limits a significant issue for buyers in Taranaki? Rarely. Because local incomes and house prices sit closer together than in the main centres, deposit size and everyday affordability are typically the more relevant factors for Taranaki buyers.

Want to Know Exactly Where You Stand?

DTI, LVR, and existing debt all factor into how much you can borrow. Get in touch and we’ll work through the numbers with you, so you know exactly what you can borrow before you start house hunting.

 

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