Debt to Income Ratios - The Definitive New Zealand Guide

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 16 January 2025

Summary:

Debt-to-income (DTI) ratios are a key factor that mortgage lenders consider when deciding whether to approve a home loan application.
DTI ratios measure the amount of debt an individual or household has compared to their income and provide a snapshot of their financial stability and ability to make regular mortgage payments. They are an important measure of financial stability and risk for both individuals and mortgage lenders and are important for getting a mortgage in New Zealand.
A lower DTI ratio can improve your chances of being approved for a mortgage and make it easier to manage your debt obligations. However, DTI ratios are not the only factor to consider when evaluating your mortgage options. Other factors, such as mortgage rates, fees, and terms, should also be considered when choosing a mortgage - DTI is merely one aspect of the affordability check.

To help you understand DTIs in detail, our guide covers:

Know This First: From 1 July 2024, new DTI rules came into law which apply to new residential lending in New Zealand, including both owner-occupier and investor lending. Per this Bell Gully update, the DTI settings allow banks to make:

20% of new owner-occupier lending to borrowers with a DTI ratio over six; and
20% of new investor lending to borrowers with a DTI ratio over seven.
As outlined by the RBNZ, these ‘speed limits’ allow a portion of banks’ new lending to go towards home loans that exceed the DTI thresholds (also known as high-DTI lending).

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What are Debt to Income (DTI) Ratios? How Do I Calculate DTIs?

DTI ratios are a financial measure used to assess an individual or household's ability to manage debt. DTI ratios are calculated by dividing an individual's or household's total debts and liabilities by their gross (before tax) yearly income. DTI ratios are typically expressed as multiples, with higher multiples indicating a higher level of debt relative to income. Lenders use DTI ratios as one of several indicators of an individual's financial stability and ability to meet their debt obligations, including mortgage payments.

To calculate your DTI ratio, you’ll need to gather a few details related to your total debt payments and your gross income:

Debt information: Make a list of your debt, including mortgage debt, outstanding credit card loans, car loans, student loans, and other debt obligations. Add up the total amount of these debt payments to get your total debt.
Income information: Calculate your gross income, which is your total income before taxes and deductions. This income will include wages, salary, and other income sources.

A typical example of a DTI ratio calculation:

DTI is best explained in practice. Say you have the following debts and liabilities:

Mortgage on your family home: $500,000
Credit card debt outstanding: $20,000
Car loan: $30,000

Your total debt is $500,000 + $20,000 + $30,000 = $550,000. Now, let's say you have a gross income of $80,000. To calculate your DTI ratio, you would divide your total debt of $550,000 by your gross income of $80,000:

DTI ratio = total debt / gross income
DTI ratio = $550,000 / $80,000
DTI ratio = 6.875

In this example, your DTI ratio is 6.875, meaning your total debt is 6.875 times your yearly income. This DTI may be considered high by some mortgage lenders, and you might need to work on reducing your debt or increasing your income to improve your DTI ratio and increase your chances of being approved for a mortgage. A mortgage broker will be able to elaborate on the typical ratios they ideally look for when approving mortgages.

Why should I care about DTI?

DTI ratios are important for several reasons, both for individuals and mortgage lenders:

A high DTI ratio can indicate that you have too much debt relative to your income, making it difficult to pay off all of your debt obligations, including your mortgage. These high debt levels can put you at risk of defaulting on your mortgage and potentially losing your home through a mortgagee sale.
DTI ratios are an important factor in the approval process for mortgage lenders. Lenders use DTI ratios to assess the risk of lending to an individual or household and may be less likely to approve a mortgage if the DTI ratio is too high. In addition, a high DTI ratio may indicate that an individual or household is already stretched thin financially and may have difficulty making regular mortgage payments.
DTI ratios are an important measure of financial stability and risk for both individuals and mortgage lenders. Understanding your DTI ratio and improving it can increase your chances of being approved for a mortgage and make it easier to manage your debt obligations.

How Can I Improve My Debt to Income Ratio?

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

1. Paying off debt

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.

2. Increasing your income

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.

3. Refinancing your debt

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.

4. Reducing your monthly expenses

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.

How can I get more information about DTI ratios and mortgages?

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.

DTI Ratios and Must-Know Facts

1. DTI ratios are only one tool a lender uses to assess mortgage applications

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.

2. DTIs don’t affect each person equally

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.

From 1 July 2024, new DTI rules came into law which apply to new residential lending in New Zealand, including both owner-occupier and investor lending. Per this Bell Gully update, the DTI settings allow banks to make:

20% of new owner-occupier lending to borrowers with a DTI ratio over six; and
20% of new investor lending to borrowers with a DTI ratio over seven.
As outlined by the RBNZ, these ‘speed limits’ allow a portion of banks’ new lending to go towards home loans that exceed the DTI thresholds (also known as high-DTI lending).

3. DTIs are intended to reduce risks for both the lender and the borrower

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.

Frequently Asked Questions About DTI Ratios

What’s a good DTI ratio for a mortgage?

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.

Can I still get a mortgage if my DTI ratio is high?

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.

Can DTI ratios be waived, or exceptions be made?

In some cases, DTI ratios may be waived, or exceptions may be made for certain individuals or circumstances. 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.

Do DTI ratios only include mortgage payments?

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.

Can DTI ratios be improved after a mortgage has been approved?

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.

How do DTI ratios compare to other financial ratios, such as the debt-to-asset or debt-to-equity ratio?

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).

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.

What happens if my DTI ratio is too high?

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.

How can I plan for DTI volatility?

To plan for DTI volatility, you can consider the following:

First, build an emergency fund: Having an emergency fund can help weather financial setbacks, such as a loss of income, and avoid increasing your DTI ratio.
Manage your debt wisely: Paying off high-interest debt, such as credit card debt, can help to reduce your DTI ratio and make it easier to manage your debt obligations.
Consider mortgage insurance: If you're concerned about DTI volatility, you may want to consider mortgage insurance, which can help to lower your monthly mortgage payments and improve your DTI ratio.
Keep an eye on your DTI ratio: Regularly monitoring your DTI ratio can help you identify any changes or potential issues and improve your DTI ratio.

How do DTI ratios impact me?

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.

Do DTI ratios apply to first-home buyers?

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.

How do DTI ratios relate to negative equity?

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 my household income drops (due to losing my job), will DTI ratios limit my ability to remortgage?

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.

Which mortgage applicants do DTI ratios get tested on?

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.

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