Near-final Lending Standard guidance

Guidance Note Lending Standard 7
Contents
Contents ................................................................................................................................................................ 7
Use and status of the Guidance 8
Glossary 9
Part A: About this Standard 10
Overview .............................................................................................................................................................. 10
Context and purpose of the Lending Standard ........................................................................................... 10
Part B: Guidance on the Lending Standard 12
Part 1: Preliminary provisions ........................................................................................................................... 12
Interpretation (Clause 3).................................................................................................................................12
Application (Clause 4).....................................................................................................................................12
Part 2: Lending criteria ...................................................................................................................................... 12
Criteria to be applied (Clause 5) ..................................................................................................................12
Nature of security (Clause 6).........................................................................................................................13
Nature of lending (Clause 7).........................................................................................................................13
Bridging finance (Clause 8)............................................................................................................................14
Equity release (Clause 9) ................................................................................................................................14
Kāinga Ora first home purchase (Clause 10).............................................................................................14
New build finance (Clause 11)........................................................................................................................14
New build purchase (Clause 12)...................................................................................................................15
Ordinary finance (Clause 13) .........................................................................................................................15
Refinancing (Clause 14)...................................................................................................................................16
Remediation finance (Clause 15) ..................................................................................................................16
Security substitution (Clause 16)...................................................................................................................16
Part 3: Loan-to-value ratios (LVR) and debt-to-income (DTI) ratios ....................................................... 17
LVR (Clause 18)..................................................................................................................................................17
Requirement to determine DTI ratio (Clause 18).....................................................................................17
DTI ratio (Clause 19).........................................................................................................................................17
Calculation of debt (Clause 20) ....................................................................................................................18
Calculation of income (Clause 21)...............................................................................................................22
Business surplus (Clause 22).........................................................................................................................23
Part 4: Lending restrictions .............................................................................................................................. 23
Restrictions by licence condition (Clause 23) ..........................................................................................23
Calculation of qualifying credit under Part 4 of the Lending Standard (Clause 24).....................29
Calculation of qualifying credit for limit relating to DTI ratio (Clause 25) .......................................30
Calculation of qualifying credit for limit relating to LVR (Clause 26) .................................................31
Loan-to-value ratio applicable in certain circumstances (Clause 27)...............................................32

Guidance Note Lending Standard 8
Use and status of the Guidance
The purpose of this Guidance is to assist licensed deposit takers (or deposit takers) to interpret and comply with the Lending Standard (the Standard). This recognises that the Standard deals with technical subject matter and there may be no case law or other external reference points to assist with its interpretation. Guidance will assist individual deposit takers with their own compliance and a more consistent approach across the industry. The Guidance assists by:

• Outlining the context and purpose of the Standard. Technical content is better understood
  with awareness of the policy intent at the time it was drafted.
• Outlining our preferred interpretation in relation to some clauses, where we have been
  made aware of differing interpretations by deposit takers.
• Provides examples of actions deposit takers could take in complying with the requirements
  in the Standard.
  To assist in using the Guidance:
• Terms that are defined in the Standard or the Deposit Takers Act 2023 (the DTA) have the
  same meaning in this Guidance.
• The Guidance is designed to be read alongside the Standard. Sections of this Guidance
  have the same headings as sections of the Standard Clause numbers are those from the Standard.
• The Guidance will not necessarily cover every clause in the Standard. Given its status as an
  interpretation aid, where we feel a Clause (when read in conjunction with the explanatory note attached to the Standard) is sufficiently self-explanatory, no additional Guidance is being provided.
• In event of any conflict between the text of the Standard and this Guidance, the Standard
  prevails. The Standard is secondary legislation made under the DTA, while the Guidance does not have formal status. The Guidance represents our view and is therefore an authoritative indicator of that view. However, ultimately, it is for a court to determine the correct interpretation of the Standard.
• The Reserve Bank will periodically review and update the Guidance. We may change our
  guidance or our interpretation of the Standard if we consider this appropriate. We do not do this lightly and will endeavour to notify deposit takers in advance if we are considering amending the content of the Guidance.
• This Guidance is not legal advice. We encourage deposit takers seek their own professional
  advice, as it is their responsibility to determine their obligations and ensure that they comply with the requirements of the Standard.
• The Guidance relates to the version of the Standard as at [day month year].
• We welcome feedback on the Guidance at any time.

Guidance Note Lending Standard 9
Glossary
Term Meaning
Borrower-based macroprudential policy
Borrower-based macroprudential policy tools restrict the amount that deposit takers can lend to borrowers based on certain criteria, such as deposit size or income. These tools include DTI and LVR restrictions. Debt-to-Income (DTI) ratio The ratio of a person’s debt to their annual income. DTI restrictions DTI restrictions limit the amount of lending deposit takers can provide to borrowers who have a large amount of debt relative to their income (above high-DTI thresholds). Loan-to-Value Ratio (LVR) The ratio of a residential mortgage loan to the value of the property, determined in accordance with the Capital Standard (or the Internal Models Standard if applicable). LVR restrictions LVR restrictions limit how much lending a deposit taker can provide to borrowers where the loan amount is large relative to the value of the property used as collateral (above high-LVR thresholds). Lending criteria These criteria determine which residential mortgage loans are to be included in the calculation of qualifying credit amounts, based on the:

• Nature of the security.
• Nature of the lending.
  Nature of the security Determines whether the mortgage securing the residential mortgage loan is over investment property, owner-occupied property, or both. Nature of lending Different categories that determine which residential mortgage loans are subject to LVR and/or DTI restrictions and how these loans must be included in the calculation of qualifying credit amounts. Qualifying credit amounts The value of residential mortgage loans provided by a deposit taker that are subject to LVR or DTI restrictions. There are separate qualifying credit amounts for investors and owner-occupiers. Speed limit The percentage of qualifying credit amounts that is permitted to exceed the high-LVR or high-DTI thresholds. Different speed limits can be applied to lending to investors and owner-occupiers. Threshold The LVR or DTI ratios that deposit takers can lend up to without any LVR or DTI restrictions applying (that is, high-LVR thresholds or high-DTI thresholds). Different thresholds can be applied to lending to investors and owner-occupiers.

Guidance Note Lending Standard 10
Part A: About this Standard
Overview

1. The [Deposit Takers (Lending) Standard 2027] (the Lending Standard) contains requirements
   for borrower-based macroprudential policy tools. The Reserve Bank uses borrower-based macroprudential policy to reduce systemic risks to the stability of the financial system related to the residential property sector. The specific tools in the Lending Standard are:
   1.1. Loan-to-value ratio (LVR) restrictions, which limit the amount of lending deposit takers
   can provide to borrowers where the loan amount is large relative to the value of the property used as collateral (for example, where the borrower has a low deposit). LVR restrictions reduce the risk to the financial system that borrowers will not be able to fully repay their loans if they default on their mortgages. Requirements for calculating the LVR are set out in Part 3 of the Lending Standard.
   1.2. Debt-to-income (DTI) restrictions, which limit the amount of lending deposit takers can
   provide to borrowers who have a large amount of debt relative to their income. DTI restrictions reduce the risk of borrowers defaulting on their mortgages or being forced to sell their houses. Requirements for calculating the DTI ratio are set out in Part 3 of the Lending Standard.
2. LVR and DTI restrictions generally apply to all new residential mortgage loans. However, some
   residential mortgage loans will not be subject to LVR and/or DTI restrictions if they meet certain requirements (as per the calculation of qualifying credit amounts outlined in Part 4 of the Lending Standard). Context and purpose of the Lending Standard
3. Macroprudential policy, in particular borrower-based measures, are reasonably common
   internationally. International regulators have increasingly embraced the role of borrower-based measures (such as LVR restrictions and debt serviceability restrictions (DSRs)) in containing systemic financial stability risks related to the residential property sector. LVR restrictions came to prominence earlier than DSRs, becoming more commonly used amongst regulators after 2009 as a key response to the vulnerabilities exposed by the Global Financial Crisis. DSRs became more widely used from 2015 onwards. The Reserve Bank uses LVR restrictions and DTI restrictions (which are a type of DSR) to address systemic risks related to the residential property sector.
4. The Reserve Bank introduced LVR restrictions in 2013 and has adjusted the settings in response
   to systemic risks in the financial system (related to the residential property sector) since then. LVR restrictions have been effective in promoting financial stability by reducing the risks stemming from a build-up of highly leveraged residential property sector loans in the financial system.
5. However, LVR restrictions relate mainly to one dimension of systemic risk related to the
   residential property sector – namely, the losses faced by deposit takers and borrowers in case of a default, known as ‘loss given default’. The other key component of systemic risk related to the residential property sector is a borrower’s capacity to service a loan, which in turn affects the ‘probability of default’. DSRs are the main macroprudential policy instrument used ____________ Timeline for loan-to-value ratio restrictions - Reserve Bank of New Zealand - Te Pūtea Matua

Guidance Note Lending Standard 11 internationally to address this second dimension of systemic risk related to the residential property sector. After considering the relative merits of different types of DSRs, the Reserve Bank published a framework for DTI restrictions in April 2023 2 , before introducing them in July
2024. 3
6. By limiting both high-LVR and high-DTI residential property lending, the Lending Standard
aims to reduce systemic risks associated with a build-up of highly leveraged residential property loans in the financial system. This helps to mitigate the risk of contagion, where extremes in residential property sector cycles can lead to adverse events in the financial system, which may spillover and lead to a severe downturn in the broader economy. The settings for LVR and DTI restrictions are flexible and can be adjusted over time in response to changes in systemic risks related to the residential property sector.
7. Further information about the Reserve’s Bank use of macroprudential tools is available in the
Macroprudential Policy Framework document. 4

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Debt serviceability restrictions - Reserve Bank of New Zealand - Te Pūtea Matua Reserve Bank activates Debt-to-Income restrictions - Reserve Bank of New Zealand - Te Pūtea Matua 4 Macroprudential Policy Framework - Reserve Bank of New Zealand - Te Pūtea Matua

Guidance Note Lending Standard 12
Part B: Guidance on the Lending Standard
Part 1: Preliminary provisions
Interpretation (Clause 3)
8. Outside of the terms defined specifically in this clause, consistent with section 20 of the
Legislation Act 2019, words or expressions used in the Lending Standard have the same meaning as the Deposit Takers Act 2023 (DTA) or referring legislation. For example, the definition of 'credit' can be found in section 6 of the DTA (which in turn refers to section 6 of the Credit Contracts and Consumer Finance Act 2003 (CCCFA)). Application (Clause 4)
9. The Lending Standard includes provisions for LVR and DTI restrictions. LVR and DTI restrictions
relate to residential mortgage loans, as defined in clause 3 of the Lending Standard. As per clause 4, the standard applies to a licensed deposit taker if stated in its licence conditions.
10. Specifically, a deposit taker’s licence conditions will specify settings for LVR and/or DTI
restrictions – namely, thresholds and speed limits. If a deposit taker’s licence conditions do not specify any thresholds and speed limits, then LVR and/or DTI restrictions do not apply.
11. The Reserve Bank intends to apply the Lending Standard to all Group 1 and Group 2 deposit
takers so that they are subject to LVR and DTI restrictions. The Reserve Bank does not intend to apply the Lending Standard to Group 3 deposit takers at this time. However, the Reserve Bank will monitor Group 3 deposit takers and if they start to pose a systemic risk to financial stability, the Reserve Bank will re-evaluate the approach and could apply the Lending Standard (and therefore LVR and DTI restrictions) to Group 3 deposit takers in the future.
12. The Reserve Bank does not intend to apply the Lending Standard to branches of overseas
deposit takers given that the business they conduct in New Zealand will be limited to wholesale clients (that will not have substantial amounts of residential mortgage loans).
Part 2: Lending criteria
Criteria to be applied (Clause 5)
13. The requirements set out in Part 2 of the Lending Standard determine how a residential
mortgage loan must be classified. Note that a “borrowing party” may include an individual or a group of persons), and includes companies and trustees. Deposit takers are expected to use their standard origination and capital modelling practice when identifying which persons form
part of the borrowing party.
14. The criteria set out in the Lending Standard relate to:
14.1. the nature of the security; and
14.2. the nature of the lending.
15. These criteria determine which residential mortgage loans are to be included in the calculation
of qualifying credit amounts and therefore subject to LVR and DTI restrictions. The calculation of qualifying credit amounts is outlined in Part 4 of the Lending Standard. It is noted that residential mortgage loans made by a deposit taker’s subsidiaries are also included in the calculation of qualifying credit amounts for that deposit taker.

Guidance Note Lending Standard 13
Nature of security (Clause 6)
16. Clause 6 of the Lending Standard requires a deposit taker to determine whether the mortgage
securing the loan is at least partly over investment property (property investment RML), or is solely over owner-occupied property (non-property investment RML). The categories are defined to be identical as those used for risk-weighting in the capital standard.
17. This has implications for the calculation of qualifying credit amounts, given that qualifying
credit amounts are to be separated based on the nature of the security. Figure 1 outlines how the nature of security relates to the different borrower types that deposit takers may encounter, which are included to explain the reporting template only.
Figure 1: Breakdown of lending by nature of security and borrower type
By nature of security By borrower type*
Non-property investment RML (Owner￾occupied property) First-home buyer Owner-occupier (without investment collateral) Property-investment RML (including loans secured by both an investment property and an owner-occupied property) Owner-occupier (with investment collateral) Investor *If commitment is known to be for business purposes it is instead reported under that borrower type.
18. Loans only secured over owner-occupied property include “First-home buyers” and “Owner￾occupiers (without investment collateral)”. Licence conditions relating to LVR and/or DTI
restrictions will not reference the borrower type and will not distinguish first-home buyers from other owner-occupiers (as LVR and/or DTI restrictions are based on the nature of security). For borrower type reporting, “First-home buyers” are not included in the Owner-occupier" (without investment collateral)” category.
19. An owner-occupier can occupy more than one property at once (that is, a secondary
residence). A secondary residence includes a holiday home or a second home that is primarily for the use of that person and no rental income is derived from that property, except to the extent that the rental income is minimal (for example, where the secondary residence is a bach that is rented out for six weeks a year). In this case, the security is treated as an owner￾occupied property and included in the “non-property investment” category.
20. Loans secured (at least partially) over an investment property include the borrower types
“Owner-occupier (with investment collateral)” and “Investor”. These are both included in qualifying credit amounts for investors (property investment RML).
21. Regardless of the underlying collateral and whether the loan is a property investment or non￾property investment RML, RML loans known to be for business purposes are reported in that
category for borrower type.
Nature of lending (Clause 7)
22. Clause 7 of the Lending Standard requires a deposit taker to determine the use of credit based
on nine categories. The different categories determine which residential mortgage loans must

Guidance Note Lending Standard 14 be included in the calculation of qualifying credit amounts and therefore subject to LVR and/or DTI restrictions. The calculation of qualifying credit amounts is set out in Part 4 of the Lending Standard.
23. The policy intent of the Lending Standard is to not restrict the amount of lending deposit
takers can provide for bridging finance, equity release, Kāinga Ora first home purchases, new build finance, new build purchases, refinancing, remediation finance or security substitution, regardless of LVR and/or DTI restrictions. It achieves this by defining the specific types of lending that are not intended to be subject to LVR and/or DTI restrictions, creating a residual “ordinary finance” category, and then only applying the LVR and/or DTI restrictions to that “ordinary finance" category.
24. The nature of lending categories are defined in clauses 8 to 16 of the Lending Standard.
Bridging finance (Clause 8)
25. Clause 8 of the Lending Standard defines situations where credit is advanced to a borrower
who has not been able to sell their existing owner-occupied property before completing the purchase of their new owner-occupied property (bridging loans). In practice, this means that the settlement date of the new property is before the settlement date on the existing property and the borrower still has a mortgage on the existing property.
26. If there is an unpaid balance on the residential mortgage loan once the bridging loan has
been repaid, it is expected that the unpaid balance be treated as a new ordinary finance loan (unless it meets the criteria for any of the other nature of lending categories described).
27. If the borrower has not repaid the bridging loan within 12 months, then clause 8 of the
Lending Standard will no longer apply and the loan is expected to be treated as a new ordinary finance loan (unless it meets the criteria for any of the other nature of lending categories described). Equity release (Clause 9)
28. Clause 9 of the Lending Standard defines situations where credit is used for reverse
mortgages. Reverse mortgages allow a borrower to borrow against the equity in their property without the requirement to pay interest or repay any of the principal until the mortgage securing the loan is discharged. In practice, this means that the property would likely be sold and the proceeds from the sale used to repay the loan. By that stage, the loan would have likely accumulated interest that would also be required to be paid when the loan is discharged. Kāinga Ora first home purchase (Clause 10)
29. Clause 10 of the Lending Standard defines situations where credit is used to purchase a
property under Kāinga Ora’s first home loan scheme. Under this scheme, Kāinga Ora indemnifies the deposit taker for any loss that may occur in connection with the loan, which reduces the risks associated with the loan. New build finance (Clause 11)
30. Clause 11 of the Lending Standard defines situations where the borrower wishes to finance the
construction of a new principal residential unit (new build). New build finance is not intended to include loans used to finance the construction of a secondary residential unit, such as a guesthouse or “granny flat”.

Guidance Note Lending Standard 15
31. New build finance covers any advance needed to complete the new build, including the
purchase of residential land, building work, design work, consent costs, and legal expenses. This may also include staged drawdowns and any further advances under the loan to cover any overrun in the cost of the new build compared to the borrower's original budget, provided that the other criteria in clause 11 of the Lending Standard are met.
32. New build financing also covers financing to prepare land for the new build – for example, the
demolition or removal of existing structures or the provision of services necessary for using the land to construct a new residential dwelling (including provision of vehicle access and essential services such as water and sewerage).
33. As per clause 11(c) of the Lending Standard credit only falls under the new build finance
category if the loan is entered into before any building work is completed other than demolition and site work. This allows for the case where work may have been undertaken to prepare the site for development prior to the buyer committing to the new build – for example:
33.1. obtaining resource or building consents to undertake the construction;
33.2. providing essential services to the site, such as a driveway, and connections to utilities;
or
33.3. preparation of the site, such as demolition and clearing or earth works.
34. As per clause 11(d) of the Lending Standard, credit only falls under the new build finance
category if the deposit taker is satisfied that the building work will be completed within a reasonable timeframe of the first advance under the loan. The intent of this clause is that the loan is not expected to be used to finance speculative purchases of land, where there is not a planned start date for construction of a new residential dwelling on the section. As a matter of prudential best practice, a deposit taker is encouraged to inspect resource or building consents.
35. Credit used for new build finance may include the purchase of residential land as long as the
credit is also used to finance the construction of a new residential dwelling on that land. For example, financing for ‘buying off the plan’ and builders’ land/build packages would be classified as new build finance, provided that the other criteria in clause 11 of the Lending Standard are met. New build purchase (Clause 12)
36. Clause 12 of the Lending Standard defines situations where credit is used for a new build
purchase provided that the borrower enters into the loan no later than 6 months after the date the code compliance certificate for the building work was issued. In practice, this means that the property has been completed. As a matter of prudential best practice, a deposit taker is encouraged to inspect code compliance certificates to obtain proof of the date of the property's completion. Ordinary finance (Clause 13)
37. As mentioned above, the “ordinary finance” category defined in Clause 13 of the Lending
Standard captures all other residential mortgage loans that do not meet the criteria of any of the other nature of lending categories. That is, “ordinary finance” is calculated as the balance of residential housing lending that does not fall within another nature of lending category. Unlike loans in the other nature of lending categories, deposit takers may be restricted in the

Guidance Note Lending Standard 16 amount of ordinary finance lending they can provide to borrowers that exceed the applicable high-LVR and high-DTI thresholds. Refinancing (Clause 14)
38. Clause 14 of the Lending Standard defines situations where a borrower switches to a different
lender or to new mortgage terms on the same property (refinancing). In practice, this means that the existing mortgage will be discharged and replaced by a new mortgage.
39. As per clause 14(c) of the Lending Standard, credit only falls under the refinancing category if
the borrower borrows an amount that does not exceed the sum of the unpaid balance of the existing residential mortgage loan at the time of repayment and incidental or ancillary costs.
40. The Reserve Bank considers the following to be examples of costs incidental or ancillary to
refinancing:
40.1. Legal expenses.
40.2. Break fees.
40.3. The previous lender reclaiming cash contributions.
41. As a matter of prudential best practice, a deposit taker is encouraged to obtain information
from the borrower on the unpaid balance on the existing loan (that will be discharged and replaced by a new loan) if they have not been the provider of that loan. For example, a deposit taker could obtain copies of recent loan statements to verify the unpaid balance. Remediation finance (Clause 15)
42. Clause 15 of the Lending Standard defines situations where credit is to be used to finance the
rebuild or repair of buildings or improvements on the mortgaged land if they are destroyed or damaged – for example, following a fire, natural disaster or other similar event (including severe weather events). It is expected that credit will be used for remediation finance when insurance does not fully cover the cost of rebuilding or repairs.
43. Foreseeable replacement of parts of a dwelling is expected to be regarded as routine work
and not considered for remediation finance. For example, re-roofing after the roof has achieved a normal lifespan and worn out, and periodically repainting, would be routine work. In contrast, replacing a roof that has failed without achieving a normal lifespan and created weather-tightness issues, would be non-routine work.
44. It is expected that remediation finance will not be used to cover lending for extensions, or for
the purchase of items (such as movable furniture or appliances) that are not normally retained in a property when it is sold. Security substitution (Clause 16)
45. Clause 16 of the Lending Standard defines situations where a borrower is moving to a new
residential property and is seeking a replacement mortgage from their current lender (with the new property used as security), subject to certain conditions. These conditions relate to how recently the borrower has lived in the existing property (per clause 16(c)) and the amount of credit provided (per clause 16(d)).

Guidance Note Lending Standard 17
Part 3: Loan-to-value ratios (LVR) and debt-to-income (DTI) ratios
LVR (Clause 18)
46. Clause 18 of the Lending Standard requires the LVR calculation.. There are two aspects to the
LVR calculation – (1) loan value and (2) property value. LVR is calculated as follows.
47. 𝐿𝑉𝑅 =
𝑙𝑜𝑎𝑛 𝑣𝑎𝑙𝑢𝑒
𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑣𝑎𝑙𝑢𝑒
∗ 100
“loan value” is broadly as defined in the relevant capital standard, and includes claims that are or will be secured over the residential property. There is an exception for internal models deposit takers, which allows deposit takers to use 100% credit conversion factors rather than its own EAD calculation if that is more tractable. “property value” is the value of the property, determined in accordance with the Deposit Takers (Capital) Standard 2027.
48. This calculation relates to LVR restrictions, which limits the percentage of a qualifying credit
amount that deposit takers can lend above a specified high-LVR threshold. This is outlined further in Part 4 of the Lending Standard.
49. As a matter of prudential best practice, a deposit taker is encouraged to establish an internal
process in determining the source of deposit funds, including checks on the use of any unsecured lending that they have provided, and take steps to avoid such funds being used for the deposit. Requirement to determine DTI ratio (Clause 18)
50. As per clause 19 of the Lending Standard, a deposit taker is required to determine the
borrowing party’s DTI ratio, if practicable in the circumstances. In some situations, it may not be practicable to determine the DTI ratio – for example, there may be complex structures and multiple borrowers involved. In such situations, the DTI ratio is expected to be recorded as undetermined. Loans with an undetermined DTI ratio are included in the calculation of qualifying credit, regardless of which nature of lending category that they are classified as. DTI ratio (Clause 19)
51. As per clause 19(1) of the Lending Standard, there are two aspects to the DTI ratio – (1) debt
and (2) income – which are discussed further in the forthcoming subsections. The borrowing party’s debt and income are the sum of the debt and income of the persons in the borrowing party, which is intended to cover all persons that the deposit taker expects will service the loan. The DTI ratio is calculated as follows.
52. 𝐷𝑇𝐼 =
𝑑𝑒𝑏𝑡
𝑖𝑛𝑐𝑜𝑚𝑒
53. This calculation relates to DTI restrictions, which limits the percentage of a qualifying credit
amount that deposit takers can lend above a specified high-DTI threshold. This is outlined further in Part 4 of the Lending Standard.
54. Clause 19(2) of the Lending Standard requires a deposit taker to make reasonable inquiries to
enable the calculation of a borrowing party’s debt and income. To comply with this clause, a deposit taker is expected to take reasonable steps to verify a person’s debt and income.

Guidance Note Lending Standard 18
Verification of debt
55. A deposit taker may follow its standard lending assessment processes when verifying a
person’s debt. For example, a deposit taker could obtain copies of recent loan statements (showing the unpaid balances), where the person is listed as a borrower. As a matter of prudential best practice, a deposit taker is also encouraged to make reasonable inquiries into other loans that the person intends to enter into (where the credit has not been advanced to the person at the time of the DTI calculation). For example, a deposit taker could obtain a copy of the credit contract and seek confirmation from the intended lender of the amount of the loan that the person intends to enter into. Verification of income
56. A deposit taker may follow its standard lending assessment processes when verifying a
person’s income, which could include the following (non-exhaustive) methods::
56.1. Confirming employment status (for example, whether permanent, casual, part-time,
contractor or fixed term contract).
56.2. Reviewing recent payslips detailing regular salary or wage income of the person.
56.3. Reviewing employment contracts or remuneration review letters.
56.4. Seeking written advice from the person’s employer, accountant or tax advisor
confirming actual or likely income levels.
56.5. Reviewing income tax assessment notices and returns.
56.6. Reviewing bank statements that confirm regular salary credits.
56.7. Reviewing market appraisals for rental income on prospective investment properties.
56.8. Reviewing other documents pertaining to income (for example, business activity
statements).
56.9. Making independent enquiries into the person’s credit history (for example, through
credit reporting bodies).
Calculation of debt (Clause 20)
57. The policy intent of clause 20 of the Lending Standard is to capture a person’s ‘total debt’ on
the day of the DTI calculation, where the calculation of a person’s debt includes the loan value of the residential mortgage loan, other credit contracts, and any other debt the deposit taker considers affects the ability of the person to meet their obligations under the residential mortgage loan.
58. This includes situations where properties may be owned by look-through companies, trusts, or
other structures, where the person is listed as a borrower and is ultimately responsible for servicing the debt. This means that in most cases the use of look-through companies, trusts, or other structures are not expected to lead to a different amount of debt (to be included in the DTI calculation), by comparison with a situation where properties are directly purchased by the person.
59. Where a person is not expected to service the debt (e.g. they are providing a guarantee or
collateral only), a deposit taker is expected to exclude both their income and debt from the DTI calculation.

Guidance Note Lending Standard 19
60. A person’s total debt also includes the full amount of any joint debt that a person holds with
another person under joint and several liability. This is because if the other person can no longer meet repayments on their portion of the joint debt, then the person is liable to meet those repayments. An example of this situation is where multiple borrowers do not share all of the same properties, as shown in Figure 2.
Figure 2: Multiple borrowers who do not share all of the same properties
61. If person A and person C are seeking to enter into a residential mortgage loan together, then
their DTI ratio is calculated as follows:
Step 1: Aggregate all debt of person A and person C, including full amounts of any joint debt. Total debt: $400,000 (person A’s residential mortgage loan) + $350,000 (person C’s residential mortgage loan) + $500,000 (person A and person B’s joint residential mortgage loan) + $600,000 (the amount that person A and person C seek to borrow) = $1,850,000 Step 2: Aggregate income from person A and person C. Total income: $110,000 (person A’s salary) + $100,000 (person C’s salary) + $30,000 (rental income on person A and person B’s investment property) + $35,000 (rental income on person A and person C’s prospective investment property) = $275,000 Step 3: Calculate the DTI ratio as $1,850,000/$275,000 = 6.73
62. The types of loans captured in the calculation of debt are discussed further below.
Residential mortgage loan (new)
63. DTI restrictions are intended to apply to the loan value of new residential mortgage loans,
except where they are not included in the calculation of qualifying credit amounts as outlined in Part 4 of the Lending Standard. DTI restrictions do not apply to other types of debt if the

Guidance Note Lending Standard 20 person is seeking credit for those types of debt (as listed below). However, clauses 20(1)(b) and 20(1)(c) of the Lending Standard require the unpaid balances of other types of debt (under which the person is a borrower) to be included in the calculation of a person’s debt for the purposes of the DTI calculation.
64. For example, a person may be seeking to enter into a new residential mortgage loan with a
loan value of $500,000. They have an existing residential mortgage loan (non-revolving) with an unpaid balance of $100,000, a personal loan (non-revolving) with an unpaid balance of $20,000, a student loan with an unpaid balance of $10,000 and no other debt. Therefore, for the purposes of the DTI calculation, the person’s debt is $630,000. Residential mortgage loan (existing)
65. DTI restrictions are intended to apply to increases in the loan value of existing residential
mortgage loans (except where they are not included in the calculation of qualifying credit amounts as outlined in Part 4 of the Lending Standard). Further, clause 20(1)(a) of the Lending Standard requires the full loan value (including the increase) of the residential mortgage loan to be included in the calculation of a person’s debt.
66. An existing mortgage that is not part of this residential mortgage loan (e.g. at another deposit
taker) is also included in debt. In this case, deposit takers are expected to include the unpaid balance in the calculation of the borrower’s debt unless that existing mortgage is revolving (in which case the credit limit is used). Revolving credit contracts
67. Clause 20(1)(b) of the Lending Standard requires the credit limits of any revolving credit
contracts (under which the person is a borrower) to be included in the calculation of a person’s debt. The credit limits (and not the unpaid balance) of a revolving credit contract more accurately reflect a person’s total debt given that they can access amounts up to the credit limit. Examples of revolving credit facilities include credit cards, overdrafts, and separate revolving credit mortgages. If a particular revolving credit facility will be secured against this mortgage and has already been counted in the mortgage loan value, it should not be double counted.
68. For example, if a person has a credit card limit of $5,000 at another lender (and no other debt)
and is seeking to enter into a new residential mortgage loan of $600,000, their debt will be calculated as $605,000 for the purposes of the DTI calculation.
69. The credit limits of revolving credit contracts are not subject to DTI restrictions, unless a new
(or increase in existing) residential mortgage loan is a revolving credit mortgage. For example, if a person is seeking a new credit card with a credit limit of $5,000, DTI restrictions do not apply to the new credit card regardless of the person’s other debts. Personal loans
70. Clause 20(1)(c)(i) of the Lending Standard requires the unpaid balances of any non-revolving
personal loans (under which the person is a borrower) to be included in the calculation of a person’s debt. For example, if a person has a personal loan with an unpaid balance of $10,000 (and no other debt) and is seeking a new residential mortgage loan with a loan value of $600,000, their debt will be calculated as $610,000 for the purposes of the DTI calculation.
71. Personal loans (that do not form part of the loan value of the mortgage being sought) are not
subject to DTI restrictions. For example, if a person is seeking a new personal loan of $20,000, DTI restrictions do not apply to the new personal loan regardless of the person’s other debts.

Guidance Note Lending Standard 21
Student loans
72. Clause 20(1)(c)(ii) of the Lending Standard requires the unpaid balances of any student loans
(under which the person is a borrower) to be included in the calculation of a person’s debt. For example, if a person has a student loan with an unpaid balance of $20,000 (and no other debt) and is seeking a new residential mortgage loan of $600,000, their debt will be calculated as $620,000 for the purposes of the DTI calculation.
73. Student loans are not subject to DTI restrictions. For example, if a person is seeking a new
student loan of $30,000, DTI restrictions do not apply to the new student loan regardless of the person’s other debts. Exclusions
74. Clause 20(2) of the Lending Standard enables deposit takers to exclude some types of debt
from the calculation of a person’s debt.
BNPL contracts
75. The unpaid balance of a buy-now pay-later (BNPL) contract may be excluded from the
calculation of a person’s debt. BNPL contracts are generally small amounts and likely to be repaid within a short period of time after the person’s DTI ratio is calculated. Loans predominately used for business purposes
76. The policy intent of clause 20(2)(b) of the Lending Standard is to exclude debt used for
business purposes from the calculation of a person’s debt.
77. However, the policy intent is to capture debt secured by a mortgage over an investment
property (or debt intended for the purchase of an investment property) in the calculation of a person’s debt. As such, the definition of “business debt” in clause 3 is intended to exclude debt secured by a mortgage over an investment property.
78. Clause 20(3) allows alternative treatments where it is difficult to separate (some or all) of the
debt of a business. The intent is that a borrowing party’s DTI can be calculated including that debt, but with a concept of business income that is broader than “business surplus” defined in clause 22, in that it does not deduct serviceability (principal and interest) costs related to the business debt included in the DTI calculation. Interest free loans
79. The policy intent of clause 20(2)(c) of the Lending Standard is that an interest free loan that
does not require repayment until the sale of the associated property may be excluded from the calculation of a person’s debt. An example of this type of loan would be when parents gift their child a deposit for the purchase of a property, where the gift may be documented as a loan to protect these sums in case of a future marital separation. Materiality threshold
80. The policy intent of clause 20(2)(d) of the Lending Standard is to allow a deposit taker
discretion in excluding debts with unpaid balances (or credit limits if revolving) of $1,000 or less from the calculation of a person’s debt. However, if a debt has an unpaid balance or limit of more than $1,000, the total unpaid balance of that debt or limit is required to be included in the calculation of a person’s debt. For example, if a debt has an unpaid balance of $10,000, then $10,000 must be included in the calculation of a person’s debt.

Guidance Note Lending Standard 22
81. The Lending Standard does not limit the number of debts that can be placed into the
materiality threshold category as long as the unpaid balances or limits of the debts do not exceed $1,000 and the total amount of debt placed into the materiality threshold category does not exceed $5,000. Calculation of income (Clause 21)
82. The policy intent of clause 21 of the Lending Standard is to capture a person’s income that is
available for servicing their debts on the day of the DTI calculation. Where a person is not expected to service the debt (e.g. they are providing a guarantee or collateral only), a deposit taker is expected to exclude both their income and debt from the DTI calculation. The calculation of a person’s income is a gross (pre-tax) annual amount, where a deposit taker is generally expected to calculate a person’s income based on historical amounts. Where the only available figures are net of tax, deposit takers are expected to re-gross these at the relevant marginal tax rate.
83. The Reserve Bank does not expect a deposit taker to obtain payslips (or other forms of income
verification) for the person dating back a full year in order to calculate the person's annual income. Given this, a deposit taker may follow its standard lending assessment processes when calculating a person’s income (in conjunction with making reasonable inquiries to verify a person’s income as per clause 19(2) of the Lending Standard) For example, in line with its standard lending assessment processes, a deposit taker may decide to aggregate a person's income from the past three months (as evidenced by payslips or other forms of income verification), then multiply by four to calculate an annual amount for the purposes of the DTI calculation.
84. A deposit taker may apply a discretionary materiality threshold (in line with its standard lending
assessment processes) before a source of income is verified and included in the DTI calculation. In practice, this means that a deposit taker may deem that minor or irregular sources of income do not impact how much debt a person can afford to service and decide to exclude these sources of income from the DTI calculation.
85. Note that weightings or ‘haircuts’ do not apply when calculating a person’s income for the
purposes of the DTI calculation.
The Reserve Bank considers that using an unweighted measure for all sources of income (that is, the full amount of income) is the simplest approach and ensures as much consistency across deposit takers as possible. However, a deposit taker may consider applying weightings or ‘haircuts’ to different sources of income as part of its own standard lending assessment (separate from the DTI requirements).
86. A person’s income may include the full amount of rental income that a person shares with
another person that is not entering the residential mortgage loan. This is because the full amount of rental income would still be received even if the other person can no longer service their portion of the joint debt that they hold with the person. Business income
87. Deposit takers may include income that a person derives from a business in the calculation of
a person’s income. For example, this may include a shareholder’s salary, wages to business owners or a business surplus where the person has direct influence over the distribution of profits. If a business surplus is included in the calculation of a person’s income, deposit takers ____________ Weightings or ‘’haircuts’ mean that income would be discounted from its full amount.

Guidance Note Lending Standard 23 must calculate it following clause 22 (unless business debt has also been included in debt, see clause 20(3)). Future income
88. The policy intent of clause 21(b) of the Lending Standard is to allow future income (in addition
to current income) to be included in the calculation of a person’s income when it is clear that the person has a right to receive that additional income (or reasonably expects additional rental or boarder income) in the year after the DTI calculation. An example of a right to receive would be where a person has a contractual agreement to receive an increase in their wages or salary over the next year.
89. As a matter of prudential best practice, a deposit taker is encouraged to obtain a copy of the
contract where the person can show the increase in their wages or salary, or e.g. a market appraisal for rental income on prospective investment properties. Business surplus (Clause 22)
90. This clause describes how surplus income from a business available to service the residential
mortgage is calculated. The starting point is net profit, but there are adjustments to deduct principal payments related to business debt and add back depreciation. Because net profit already takes interest expenses into account, no further deductions are needed to account for these costs. However, it is permissible for the deposit taker to use a sensitised or test interest rate to obtain a higher estimate of interest costs than actual interest paid, and otherwise use conservative assumptions if it does not consider the business surplus is sufficiently sustainable to be treated as available to service the mortgage. Note that forecasts of future business income and surplus are not intended to count as income (as they are not contractual rights) – these calculations should instead be based on current data.
Part 4: Lending restrictions
Restrictions by licence condition (Clause 23)
91. As per clause 23(1) of the Lending Standard, a deposit taker’s licence conditions may restrict its
lending for residential mortgage loans based on DTI and LVR restrictions. Specifically, a deposit taker’s licence conditions may specify settings for DTI and/or LVR restrictions – namely a specified ratio (also known as a threshold), a limit (also known as a speed limit), a class (either property investment RML or non-property investment RML) and a measurement period. Thresholds (specified ratios)
92. Clause 23(4)(a) of the Lending Standard sets out a range of DTI ratios, known as high-DTI
thresholds, that may be specified in a deposit taker’s licence conditions. A high-DTI threshold refers to the specific DTI ratio that a deposit taker can lend up to without DTI restrictions applying. Qualifying residential mortgage loans with DTI ratios that exceed these thresholds would be classified as high-DTI loans and the deposit taker would be restricted in how much lending they can do above these thresholds (based on the applicable speed limits).
93. Clause 23(4)(b) of the Lending Standard sets out a range of LVRs, known as high-LVR
thresholds, that may be specified in a deposit taker’s licence conditions. A high-LVR threshold refers to the specific LVR that deposit takers can lend up to without LVR restrictions applying. Qualifying residential mortgage loans with LVRs that exceed these thresholds would be classified as high-LVR loans and the deposit taker would be restricted in how much lending they can do above these thresholds (based on the applicable speed limits).

Guidance Note Lending Standard 24
Speed limits
94. Clause 23(3) of the Lending Standard sets out a maximum limit, where any number (in the
form of a percentage) up to that limit may be specified in a deposit taker’s licence conditions (speed limit). A speed limit is the percentage of a qualifying credit amount that is permitted to exceed the high-DTI threshold or high-LVR threshold.
95. In other words, a speed limit allows a deposit taker to still make ordinary finance loans that
exceed the high-DTI threshold or high-LVR threshold up to the percentage specified in its licence conditions. Speed limits aim to reduce the efficiency costs of DTI and LVR restrictions by giving deposit takers some flexibility to make these loans if the underlying risk characteristics of the borrower justify it, allowing some borrowers to still access loans that exceed the high-DTI threshold or high-LVR threshold.
96. Clauses 23(2)(a) and 23(2)(b) of the Lending Standard provide for separate speed limits for
each of the DTI and LVR restrictions. For example, if a residential mortgage loan exceeds both the high-DTI and high-LVR thresholds, it will count towards the speed limits for both DTI and LVR restrictions (if it is included in a qualifying credit amount). If a residential mortgage loan exceeds the high-DTI threshold but not high-LVR threshold it will count towards the DTI speed limit but not the LVR speed limit (and vice versa). Having separate DTI and LVR speed limits allows the Reserve Bank to adjust DTI and LVR settings independently and so better manage different types of risks through the cycle.
97. Further, property investment and non-property investment RML are grouped separately when
calculating qualifying credit amounts, which means that property investment and non-property investment RML are not subject to the same speed limit. Given this, property investment and non-property investment RML may have different DTI and LVR settings (that is, thresholds and speed limits) to each other. For example, non-property investment RML could be subject to an LVR speed limit of 20% over a high-LVR threshold of 80% and property investment RML be subject to an LVR speed limit of 10% over a high-LVR threshold of 70%.
98. The policy intent of clause 23(2)(a) of the Lending Standard is to also treat all residential
mortgage loans that have an undetermined DTI ratio as if they exceed the high-DTI threshold. These loans are to be included in relevant qualifying credit amounts for DTI restrictions, regardless of which nature of lending category that they are classified as. For example, if there is a high-DTI threshold of 6 for owner-occupiers and if a residential mortgage loan to an owner-occupier has an undetermined DTI ratio, then that residential mortgage loan is required to be included in the qualifying credit amount for owner-occupiers (regardless of the nature of lending category) and treated as if it exceeds the high-DTI threshold of 6. In other words, this residential mortgage loan is required to count towards the DTI speed limit for owner￾occupiers.
99. The Reserve Bank could use DTI and LVR settings (that is, thresholds and speed limits) outside
of the range set out in the Lending Standard if market conditions warranted other settings. However, the Lending Standard would need to be amended to enable this; hence lengthening the process when it comes to adjusting DTI and LVR settings. Measurement periods 100.When imposing DTI and/or LVR restrictions via a deposit taker’s licence conditions, the conditions will also specify the measurement period to which the DTI and/or LVR settings apply.

Guidance Note Lending Standard 25
101. As per clause 23(6) of the Lending Standard, measurement periods will begin on the first day
of any calendar month, and the relevant initial measurement period during which DTI and/or LVR settings apply would be the three or six calendar months starting from that date. 102.The subsequent measurement period would be the three or six calendar months starting one month after the initial measurement period, and so on. These are known as rolling measurement periods. The rolling measurement periods may continue indefinitely, but will restart when there are changes to DTI and/or LVR settings (that is, there is no overlap between the measurement periods for the old and new settings). This is set out in Figures 3, 4 and 5 below, where the LVR and/or DTI settings apply at the tip of the arrow in respect of the measurement period spanned by the arrow. 103.Changes in DTI and/or LVR settings will be set out in revised licence conditions, which will also state when the initial measurement period ends for the new settings. As stated previously, the initial measurement period that applies to the new settings would be three or six calendar months starting from when the new settings apply. Therefore, the new settings will not become binding until the initial measurement period ends. 104.The Reserve Bank intends for three-month rolling measurement periods to apply to Group 1 deposit takers (see Figure 3), which will be set out in licence conditions for Group 1 deposit takers. 105.However, a six-month rolling measurement period could be applied to Group 1 deposit takers. The Reserve Bank generally only intends to apply a six-month measurement period to Group 1 deposit takers in the initial measurement period after stricter DTI and/or LVR settings come into effect if it feels as if it is warranted. The subsequent measurement periods would be expected to revert to three-month rolling periods (see Figure 4), which would be set out in licence conditions for Group 1 deposit takers. 106.The Reserve Bank intends for six-month rolling measurement periods to apply to Group 2 deposit takers (see Figure 5), which will be set out in licence conditions for Group 2 deposit takers.

Guidance Note Lending Standard 26
Figure 3: Measurement periods for Group 1 deposit takers (three months)
Notes:
Measurement periods are three months. Measurement periods for the old DTI and/or LVR settings apply up until periods ending on the last day of T-1. At T there is a hiatus in compliance to reflect the change to the new settings, where the initial measurement period for the new settings apply to the period ending on the last day of T+2 (and includes the months T, T+1 and T+2). Note that the new settings will not become binding until the initial measurement period ends on the last day of T+2. Subsequent measurement periods for the new settings are three month rolling periods, the first of which ends on the last day of T+3 (and includes the months T+1, T+2 and T+3).

Guidance Note Lending Standard 27
Figure 4: Measurement periods for Group 1 deposit takers (initial six-month measurement period)
Notes:
Measurement periods are three months, except for the initial period after DTI and/or LVR settings are tightened (which is six months). Measurement periods for the old DTI and/or LVR settings apply up until periods ending on the last day of T￾1. At T there is a hiatus in compliance to reflect the change to the new settings, where the initial measurement period for the new settings apply to the period ending on the last day of T+5 (and includes the months T, T+1, T+2, T+3, T+4 and T+5). Note that the new settings will not become binding until the initial measurement period ends on the last day of T+5. Subsequent measurement periods for the new settings are three month rolling periods, the first of which ends on the last day of T+6 (and includes the months T+4, T+5 and T+6).

Guidance Note Lending Standard 28
Figure 5: Measurement periods for Group 2 deposit takers (six months)
Notes:
Measurement periods are six months. Measurement periods for the old DTI and/or LVR settings apply up until periods ending on the last day of T-1. At T there is a hiatus in compliance to reflect the change to the new settings, where the initial measurement period for the new settings apply to the period ending on the last day of T+5 (and includes the months T, T+1, T+2, T+3, T+4 and T+5). Note that the new settings will not become binding until the initial measurement period ends on the last day of T+5. Subsequent measurement periods for the new settings are six month rolling periods, the first of which ends on the last day of T+6 (and includes the months T+1, T+2, T+3, T+4, T+5 and T+6). Licence conditions specific to deposit takers 107.The Reserve Bank intends to apply the Lending Standard to all Group 1 and Group 2 deposit takers, where they will generally be subject to the same settings for DTI and LVR restrictions. That is, the same high-DTI and high-LVR thresholds and speed limits are intended to apply to all Group 1 and Group 2 deposit takers as specified in licence conditions. 108.However, the Reserve Bank has the option to apply different DTI and LVR settings to a deposit taker, compared to other deposit takers. That is, different high-DTI and high-LVR thresholds and speed limits may be applied to a deposit taker as specified in its licence conditions. The Reserve Bank would consider using this option if a deposit taker was engaging in activities to actively avoid DTI and LVR restrictions. In such cases, the Reserve Bank may impose stricter DTI and/or LVR settings on that deposit taker. 109.Examples of potential avoidance activities include:
109.1. entering into a series of separate contracts to create what in substance is a single
residential mortgage loan transaction;
109.2. entering into an arrangement with a borrower to channel funding to the borrower
through a third party, or to guarantee their debt to another lender, to enable the purchase of a residential property with total borrowing which would count as a high￾LVR loan for the deposit taker if it was all provided directly by the deposit taker;
109.3. directing the borrower to another lender where that lender:

Guidance Note Lending Standard 29 a. lends the borrower an amount such that the deposit taker’s new residential mortgage loan to the borrower would have an LVR less than the high-LVR threshold; b. provides a new residential mortgage loan to the borrower that exceeds high￾DTI or high-LVR thresholds, where that loan is financed by the deposit taker (for example, through a warehousing arrangement).
109.4. arrangements involving the use of additional collateral to hold the LVR on a residential
mortgage loan below the high-LVR threshold;
109.5. providing lending primarily reliant on residential property as security that is treated as
outside the residential mortgage loan asset class (for example, in the corporate asset class), where the lending would be high-DTI or high-LVR lending if it was treated as a residential mortgage loan;
109.6. providing a residential mortgage loan against a property already subject to a charge
in favour of another person, where if the lending secured by the charge had been part of the residential mortgage loan, the residential mortgage loan would have counted as high-LVR lending for the deposit taker;
109.7. permitting a borrower to grant a charge in favour of another person over a residential
property used as security for a residential mortgage loan, where if the lending secured by the charge had been part of the residential mortgage loan, the residential mortgage loan would have counted as high-LVR lending for the deposit taker;
109.8. acting as a broker or arranging a residential mortgage loan, which is ultimately
provided by an associated person or holding entity (as defined in clause 7 of the DTA); or
109.9. providing a residential mortgage loan to a borrower where the deposit taker is aware
that the borrower’s deposit for the purchase of the residential property to which the residential mortgage loan relates, has been, or will be, funded by unsecured lending, including credit cards, provided by that deposit taker in the case where, had the unsecured lending been part of the residential mortgage loan, the residential housing loan would have counted as a high-LVR loan for the deposit taker.
110. The Reserve Bank intends to monitor a deposit taker’s use and promotion of products based
on such activities (measured by the total volume or as a proportion of its residential housing lending). Calculation of qualifying credit under Part 4 of the Lending Standard (Clause 24)
111. As per clause 24(1) of the Lending Standard, the calculation of qualifying credit includes the
credit limits of residential mortgage loans (plus increases in the credit limits of existing residential mortgage loans) that a deposit taker (or a subsidiary) has entered into during the lending period. There are separate qualifying credit amounts for DTI and LVR restrictions, where the calculations are outlined further in clauses 25 and 26 of the Lending Standard.
112. For the purposes of clause 24 of the Lending Standard, a deposit taker enters into a new
residential mortgage loan (or increase of an existing residential mortgage loan) when it is committed to providing the loan. This is the point when the deposit taker offers the borrower the loan in final form (or when the deposit taker sends the (amended) loan documentation to the borrower for an increase of an existing residential mortgage loan).

Guidance Note Lending Standard 30
113. A loan in final form is generally offered the day on which a deposit taker sends the loan
documentation to the borrower’s solicitor, or an equivalent stage in the process if the borrower is not using a solicitor (for example, sending the loan documentation directly to the borrower). By this point the credit risk is regarded as being the same as if the residential mortgage loan was already on the balance sheet of the deposit taker.
114. The lending period that applies to a qualifying credit amount associated with a new residential
mortgage loan (or an increase in an existing residential mortgage loan) relates to when a deposit taker enters into a commitment to provide the residential mortgage loan, not when the residential mortgage loan is subsequently drawn down.
115. There may be some instances where a new residential mortgage loan (or an increase in an
existing residential mortgage loan) may not be drawn down for a period after it was committed. For example, a borrower may have a long settlement period when purchasing a property, such that the settlement date is not in the same period as the lending period when the new residential mortgage loan was committed. Therefore, the DTI and/or LVR settings that apply to that loan are the settings in place when the new residential mortgage loan is committed to.
116. Further, when entering into a commitment for a new residential mortgage loan, it is expected
that a specific property has been identified and an amount agreed for the residential mortgage loan that will be advanced to the borrower (or, in the case of a lending facility, for the facility limit). Calculation of qualifying credit for limit relating to DTI ratio (Clause 25)
117. Clause 25 of the Lending Standard sets out the calculation of the two qualifying credit
amounts for DTI restrictions, where loans that include investment properties (property investment RML) and those solely over owner-occupied properties (non-property investment RML) are separated.
118. The calculation of the two qualifying credit amounts for DTI restrictions is based on the nature
of lending, where:
118.1. Residential mortgage loans that are classified as ordinary finance are included in the
calculation of qualifying credit amounts.
118.2. Residential mortgage loans that are classified as equity release are not included in the
calculation of qualifying credit amounts.
118.3. Residential mortgage loans that are classified as any other nature of lending category
are included in the calculation of qualifying credit amounts if they have a DTI ratio less than or equal to the high-DTI threshold.
118.4. Residential mortgage loans that have an undetermined DTI ratio are included in the
calculation of the two qualifying credit amounts, regardless of the nature of the lending (except for equity release).
119. This is set out in Figure 6 below.

Guidance Note Lending Standard 31
Figure 6: Qualifying credit amount calculation for DTI restrictions (owner-occupier and investor)
Nature of lending DTI
Included in qualifying credit amount
Owner-occupier Investor
Ordinary finance
High Y Y
Low Y Y
Undetermined Y Y
Equity release
High N N
Low N N
Undetermined N N
Bridging finance
New build finance
New build purchase
Refinancing
Remediation finance
Security substitution
High N N
Low Y Y
Undetermined Y Y
Kainga Ora first home loan
High N N/A
Low Y N/A
Undetermined Y N/A
Notes: High DTI means that the residential mortgage loan has a DTI ratio greater than high-DTI thresholds (as specified in a deposit takers licence conditions). Low DTI means that the residential mortgage loan has a DTI ratio less than (or equal to) high-DTI thresholds (as specified in a deposit takers licence conditions). Undetermined DTI means that the residential mortgage loan has an undetermined DTI ratio. Calculation of qualifying credit for limit relating to LVR (Clause 26) 120.Clause 26 of the Lending Standard sets out the calculation of the two qualifying credit amounts for LVR restrictions, where investors and owner-occupiers are separated.
121. The calculation of the two qualifying credit amounts for LVR restrictions is based on the nature
of lending, where:
121.1. Residential mortgage loans that are classified as ordinary finance are included in the
calculation of qualifying credit amounts, except if:
a. the loan is secured by a mortgage over both an investment property and an owner-occupied property; b. the loan has an LVR greater than the high-LVR threshold for investor loans; and
c. the loan has an LVR less than or equal to the weighted average LVR threshold
(as per clause 27(2) of the Lending Standard).
121.2. Residential mortgage loans that are classified as equity release are not included in the
calculation of qualifying credit amounts.

Guidance Note Lending Standard 32
121.3. Residential mortgage loans that are classified as any other nature of lending category
are included in the calculation of qualifying credit amounts if they have a LVR less than or equal to the high-LVR threshold. 122.This is set out in Figure 7 below.
Figure 7: Qualifying credit amount calculation for LVR restrictions (owner-occupier and investor)
Nature of lending LVR
Included in qualifying credit amount
Owner-occupier Investor
Ordinary finance
High Y Y
Low Y Y
Ordinary finance
(weighted average LVR) 6

All N/A See Figure 8
Equity release
High N N
Low N N
Bridging finance
New build finance
New build purchase
Refinancing
Remediation finance
Security substitution
High N N
Low Y Y
Kainga Ora first home loan
High N N/A
Low Y N/A
Notes: High LVR means that the residential mortgage loan has a LVR greater than high-LVR thresholds (as specified in a deposit takers licence conditions). Low LVR means that the residential mortgage loan has a LVR less than (or equal to) high-LVR thresholds (as specified in a deposit takers licence conditions). Loan-to-value ratio applicable in certain circumstances (Clause 27) 123.The intent of clause 27 of the Lending Standard is to clarify how an ordinary finance residential mortgage loan is to be treated when it is secured by a mortgage over both investment property and owner-occupied property (cross-security finance), where the high-LVR threshold differs for investors and owner-occupiers. 124.To determine the treatment of these loans, a weighted average of the high-LVR thresholds applies as per clause 27(2) of the Lending Standard. The weighted average of the high-LVR thresholds is calculated as the sum over all properties of each high-LVR threshold applicable to a property multiplied by the value weight of each property. 125.In general, the full amount of a cross-security finance loan counts towards the qualifying credit amount for property investment RML (given that there is investment collateral involved). However, as noted above and in Figure 8, qualifying credit excludes cross-security finance loans where the LVR is less than (or equal to) the weighted average LVR threshold and greater than the investor high-LVR threshold. This means these loans do not count towards the speed limit. ____________ 6 Where a residential mortgage loan is to be secured by a mortgage over both an investment property and an owner-occupied property.

Guidance Note Lending Standard 33
126.Note that whether a loan is treated as cross-security finance does not affect qualifying credit amounts for DTI restrictions as collateral is not considered in the DTI calculation.
Figure 8: Qualifying credit amounts for cross-security ordinary finance
LVR Included in qualifying credit amount
Greater than the weighted average LVR threshold (if ordinary finance) Y Less than (or equal to) the weighted average LVR threshold and greater than the investor high-LVR threshold N Less than (or equal to) the investor high￾LVR threshold Y 127.For example, assume a borrower has a property that they live in valued at $1,000,000 and a residential mortgage loan valued at $550,000. That borrower then seeks an increase in the credit limit of the residential mortgage loan by $850,000 to purchase an investment property, which is also valued at $1,000,000. The total value of the residential mortgage loan is secured over both properties. The residential mortgage loan is an property investment RML as investment collateral is being used as security for part of the residential mortgage loan. 128.The total value of the residential mortgage loans divided by the total value of the properties is 1,400,000/2,000,000 = 0.7. Assume that owner-occupier lending becomes high LVR at an LVR threshold of greater than 80%, while investor lending becomes high LVR at an LVR threshold of greater than 65%. The weighted average LVR threshold is then (.65*.5 + .80 *.5) = 0.725. 129.The borrower has an LVR of 70%, which is above the investor high-LVR threshold of 65% and less than the weighted average LVR threshold of 72.5%. This means that the increase in the credit limit of the borrower’s residential mortgage loan ($850,000) is not included in the calculation of the qualifying credit amount.