Although not formally in place, it is convenient to consider the debt-to-income ratios (DTI) as one of the bank's new lending criteria.
A debt-to-income ratio means people can only get lending from the bank up to a certain multiple of their income. For instance, if a bank imposed a DTI of 7, someone can only get up to 7 times their gross annual household income, plus the rental on the new build investment property at 80% (20% vacancy allowance). Although, on existing properties banks will only consider 70% of the rental income (30% vacancy allowance).
This makes it particularly difficult for investors with an existing portfolio to keep expanding because their income relative to outstanding debt is too low. For first-time investors who already own their own home; it is now harder to access lending for your first investment property, but certainly not impossible – so long as the debt outstanding on your owner-occupied house is relatively low.
It is easy to calculate how much lending they can achieve by multiplying their current household income + rental income by 7 and then taking off any debt.
Let's look at this example:
Household income of $150k
Expected rent from proposed purchased $25k
$300k left outstanding on your own home
Debt-to-income ratio imposed of 7
Borrowing capacity = ((150,000 + 25,000) x 7) - 300,000
Borrowing capacity = $925,000
In this case, this investor can look for investment properties up to $925,000 (based on their borrowing capacity). The best investment is the one you can get funding for–so knowing what your lending ability is will allow investors to set their targets on investment properties that are within their reach and streamline the purchasing process.
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