There have been a lot of articles circulating in the media lately about the debt-to-income ratios proposed to be introduced at the end of June this year. In my 12 years of experience dealing with individual investors or the investment market as a group, there is a consistent phenomenon that we all tend to adhere to. There seems to be this law of assumption that these policies or changes to the market are mainly going to affect someone else, but not ourselves. 

We justify this by saying that our own investments have been performing well, or I have a good relationship with the bank, or I have good cashflow and equity, so when I want another investment property, I’ll be fine. Many investors fail to consider the macro environment around them and become surprised when something adverse occurs to them, even though the warning signs have been there for a while.  

So, I think every investor, whether you have any active intentions to purchase or not, needs to understand how these debt-to-income ratios are going to affect you. You could very well be prevented from borrowing for the next investment for years to come.

The Proposal 

The Reserve Bank has proposed to introduce debt-to-income (DTI) ratios on new borrowing to owner-occupiers at a limit of six, and for investors at a limit of seven. That means, as an investor, your income (personal and rental) multiplied by six and seven respectively, is the total amount of debt you can assume (including personal debt, student loans, credit cards, vehicle loans, and mortgages – all debt). The banks could also potentially scale your income down as they do with current test rates, whether that is rental income or your ‘self-employed’ income.  

DTI ratios are designed as a ceiling to debt and ultimately it will not affect much of the general market as the bank test rates and LVR’s are already restrictive enough for most owner-occupiers and for some investors. However, as interest rates reduce, and the banks calculations allow more borrowing, this debt ceiling will kick in and help to prevent the market from overheating as happened in 2020 and 2021.  

The Impact 

It has been stated by many commentators that these will have minimal impact on most buyers. They are mainly referring to owner-occupiers. However, investors with a few properties, depending on their leveraging, will find that their current DTI ratio will be closer to this factor of seven than they realise, potentially preventing them from purchasing once these are introduced.  

I’ve had one investor tell me that you can always find a way around this. That’s true, some might be able to, but the whole market being able to find a loop hole? I’m not convinced. Another investor said to me that more people will just use multiple banks, but came up short when I pointed out that their income could only be used across the board, not multiple times with multiple banks. In fact, this approach could be more restrictive.  

Now it is true that the banks have been granted an allowance of 20% of new lending that can exceed the DTI ratio limit for investors, but they will only do this at a comfortable exposure level. Potential purchasers should not just assume they could meet the criteria. I have no doubt that some people will find a way through, but many won’t and will get a nasty shock when they attempt to buy another property in the latter half of the year and find they will be turned down. It may take years for their income levels to rise enough to increase their debt ceiling and purchase again.  

Historical Lessons 

When the LVR’s were tightened from 80% to 60% lending in 2016, many investors were caught out and surprised they couldn’t purchase. Numerous owners found afterwards that they also couldn’t sell as the banks were keen to retain any proceeds from the sale to displace across their existing portfolio and reduce their LVR exposure. That LVR change was not forecast, but simply announced at 1pm one afternoon catching everyone off-guard, whereas DTI’s have been signalled well in advance. This time investors have an opportunity to assess their situation and make an informed decision to purchase now before DTI’s are implemented. 

What Should You Do? 

These DTI ratio details have been proposed by the Reserve Bank and submissions have been called for and are being considered. The exact details are yet to be announced, but I would not expect a significant deviation away from what is being proposed.  

All investors should do two things right now. Calculate your income and use the proposed multipliers to determine your approximate debt ceiling. Then calculate your current debt (both personal and mortgage) and assess whether you are under or over your potential debt ceiling and by how much. Secondly, and most importantly, discuss this with your accountant. Have them review your situation and ask their advice on how these proposals will affect you into the future.  

We already have a number of investors enquiring to purchase now, citing concern about the DTI restrictions. If you believe these proposals could lock you out, but you have the ability to pass bank test rates right now, then consider purchasing soon. If you are an investor that thinks long term, then securing the right investment property for your portfolio now is something to consider. We have some great properties on the market right now, and after June it might be too late for you.

The statements made within this article are in the opinion of the individual writer only and do not constitute legal or specialist financial advice. Please seek independent legal and financial advice when dealing with all property transactions.  

Matt Morton is a specialist residential investment broker (since 2011).