Debt to Income Ratios Explained (2024)

​Our Debt-to-Income (DTI) ratios guide explains what they mean and how they influence your home loan prospects. Our guide explains ways to enhance your ratio and must-know facts and frequently asked questions.

Updated 14 September 2023

​There are several ways to improve your DTI ratio, including:

​You can improve your DTI ratio by paying off debt. This debt reduction may involve paying off high-interest credit card debt first or negotiating with creditors to lower your monthly payments, freeing up cash to pay down other forms of debt. Our guide to paying off credit card debt on an average income has more details.

​Increasing your income can increase the denominator in your DTI ratio calculation, lowering your DTI ratio. This income increase may involve negotiating a pay rise, finding a higher-paying job, or starting a side hustle to generate additional income.

​Refinancing your debt can lower monthly payments and improve your DTI ratio. This may involve consolidating your debt into a single loan with a lower interest rate or extending the loan term to lower your monthly payments, freeing up more cash to pay down your total debt amount.

​Reducing your monthly expenses can free up more income to pay off debt and improve your DTI ratio. This spending reduction may involve cutting back on unnecessary expenses, saving money on bills and groceries, or finding cheaper housing or transportation options.

If you want to learn more about DTI ratios and mortgages in New Zealand and how they affect your situation, we suggest talking to a mortgage broker who can help you navigate the mortgage process and provide information about DTI ratios and other factors that may affect your ability to get a mortgage.

​Banks implement DTI ratio restrictions to improve their lending standards. In particular, they implement DTI ratio restrictions to reduce the risk of people defaulting on their mortgages. In other words, they become more strict on who they lend to and only choose to lend to Kiwis that can afford to service their mortgage. Many banks do this to preempt interest rate (and therefore mortgage rate) rises, which might pressure households with mortgages in New Zealand.

​BNZand ASB The only two banks in New Zealand that have publicly announced they’re implementing DTI ratios in their mortgage approval process. They’ve done so voluntarily rather than through enforcement from the Reserve Bank of New Zealand (RBNZ). ANZ, Westpac and Kiwibank have not publicly stated they're using DTI ratios to assess home loan applications formally. However, that doesn't mean they don't utilise it to assess a mortgage applicant's financial situation.

​BNZ and ASB may have chosen to implement DTI ratios to assess the risk of lending to an individual or household and determine the mortgage an individual or household can afford. DTI ratios are a common tool used by mortgage lenders to assess the risk of lending to an individual or household. Therefore, implementing DTI ratios may help BNZ and ASB make informed lending decisions.

​It's not certain that all banks in New Zealand will start implementing DTI ratios, as this is a decision that each bank will make based on its risk management policies and practices. However, DTI ratios are a common tool used by mortgage lenders to assess the risk of lending to an individual or household. As a result, more banks in New Zealand may start implementing DTI ratios in the future.

​DTI ratios are a key metric that mortgage lenders use to assess a borrower's ability to repay a loan, but it is not the only factor. Lenders will also consider credit history, income, assets, down payment, employment history, property type and other factors when evaluating a mortgage application.

A high DTI ratio doesn’t necessarily mean that a borrower won’t be approved for a loan, as the lender will consider the borrower's overall financial situation. Factors such as a high income, a long credit history, or many assets can offset a high DTI ratio.
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All concerns regarding DTIs are valid. However, it's important to note that as of 2023, each specific bank is voluntarily deciding to implement DTI ratios on their own and, as such, are setting their standards on when they apply this, who this applies to and what standard they hold each specific mortgage application to. The implementation of DTI ratios is not a blanket decision made by the RBNZ, so it's unlikely that Kiwis will all be affected by DTI ratios similarly.

​Generally, DTI ratio restrictions are implemented by banks to ensure responsible lending and reduce risk from a bank's balance sheet. By assessing a borrower's ability to repay a loan, a DTI ratio helps a lender determine if a borrower is a good credit risk. It also helps the borrower by ensuring that they are not taking on too much debt, which can lead to financial difficulties in the future. This scenario makes it a win-win situation for both the lender and the borrower.

There’s no one-size-fits-all answer to this question, as DTI ratios can vary depending on the lender and the mortgage you're applying for. In general, the lower the DTI ratio, the less risky you’ll be in the eyes of the bank. Some banks have stipulated that they won't approve a mortgage on DTI ratios higher than six times per this 2021 NZ Herald article, so Kiwis might infer that having a DTI ratio lower than five times might be beneficial, although three to four is preferred given interest rate increases since late 2021.

It's possible to get a mortgage with a high DTI ratio, but it may be more difficult and may require you to take steps to improve your DTI ratio. Some lenders may be more lenient with DTI ratios and may be willing to approve a mortgage with a higher DTI ratio if you have a strong credit score or other favourable factors. However, getting a mortgage with a lower DTI ratio is generally easier, so it's a good idea to work on reducing your debt or increasing your income to improve your DTI ratio.

​In some cases, DTI ratios may be waived, or exceptions may be made for certain individuals or circ*mstances. For example, some lenders may be willing to overlook a high DTI ratio if an individual has a strong credit score or a long history of making timely debt payments. However, DTI ratios are generally considered an important factor in the mortgage approval process, and it's rare for them to be completely waived. Therefore, it's always a good idea to improve your DTI ratio to increase your chances of being approved for a mortgage.

​DTI ratios generally include all debt payments, not just mortgage payments. This debt includes credit card balances, car loans, student loans, and other debt obligations. Therefore, it's important to include all your debt payments when calculating your DTI ratio, as this will give a more accurate picture of your financial situation. It's not uncommon for some New Zealanders to have $30,000+ of non-mortgage debt, primarily made up of a car loan, personal loan and a credit card balance. All debt has to be included.

​Yes, DTI ratios can be improved after a mortgage has been approved. If your DTI ratio was on the high side when you applied for a mortgage, you might want to consider ways to reduce your debt or increase your income to improve your DTI ratio and make it easier to manage your mortgage payments. This change may involve paying off debt, increasing your income, refinancing your debt, or reducing your monthly expenses. Improving your DTI ratio can increase your financial stability and reduce the risk of defaulting on your mortgage.

​No, there isn’t one “maximum DTI ratio” that all banks set for DTI ratios. The maximum DTI ratio for a mortgage in New Zealand can vary depending on the lender and the type of mortgage you're applying for. Some lenders may have stricter DTI ratios than others, and some types of mortgages may have higher DTI ratios due to the higher risk involved for the lender.

DTI ratios are similar to other financial ratios that measure an individual or household's debt relative to a financial metric. For example, the debt-to-asset ratio measures the total value of an individual or household's debt compared to the total value of their assets. Likewise, the debt-to-equity ratio measures the total value of an individual or household's debt compared to the total value of their equity (the portion of the assets they own outright).
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While these ratios are important for understanding an individual or household's financial stability, DTI ratios focus on debt relative to income. Mortgage lenders typically use them to assess the risk of lending to an individual or household. Therefore, understanding your DTI ratio and taking steps to improve it can increase your chances of being approved for a mortgage and make it easier to manage your debt obligations.

DTI ratios can be affected by mortgage rate type in certain situations. For example, banks may set lower DTI ratio caps on some mortgage rate types, such as variable rate mortgages, due to the higher risk involved for the lender. This scenario occurs because variable interest rates can fluctuate over time, which can increase the monthly mortgage payments and ultimately grow your debt load.
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On the other hand, fixed-rate mortgages have a consistent interest rate that does not fluctuate, which can result in banks being more lenient on the maximum DTI ratio. Considering different mortgage rate types, it's important to consider the impact on your DTI ratio, as this can affect your ability to get a mortgage.

Getting a mortgage may be more difficult if your DTI ratio is too high. Some lenders may be willing to approve a mortgage with a high DTI ratio if you have a strong credit score or other favourable factors. Still, getting a mortgage with a lower DTI ratio is generally easier. If your DTI ratio is too high, you may want to consider ways to reduce your debt or increase your income to improve your DTI ratio.

​DTI ratios can impact you by affecting your ability to get a mortgage. If your DTI ratio is too high, getting a mortgage may be more difficult, as some lenders may view you as a higher-risk borrower. A high DTI ratio can also make it more difficult to manage your debt obligations and may increase the risk of defaulting on your mortgage.

​Yes, DTI ratios apply to first-home buyers. If you're a first home buyer, it's important to understand your DTI ratio and take steps to improve it, as this can increase your chances of being approved for a mortgage and make it easier to manage your debt obligations.

​Negative equity occurs when the value of a property is lower than the outstanding mortgage debt on the property. If you have negative equity and your DTI ratio is already high, it may be difficult to refinance your mortgage or sell the property without incurring additional debt. This difficulty in refinancing can make improving your DTI ratio and managing your debt obligations more difficult.

If your household income drops due to a job loss, your DTI ratio may increase, limiting your ability to remortgage. This situation happens because a higher DTI ratio may make getting a mortgage difficult, as some lenders may view you as a higher-risk borrower. Therefore, if you cannot remortgage, you may need to consider other options, such as negotiating with your lender to modify your mortgage terms or selling the property.

​DTI ratios apply to individuals and households seeking a mortgage or refinancing their existing mortgage. DTI ratios are used by mortgage lenders to assess the risk of lending to an individual or household and to determine the amount of mortgage that an individual or household can afford.