Reserve Bank of New Zealand Draft Framework for Restrictions on High Debt-To-Income Residential Mortgage Lending

Ref #X918869 v1.1

Draft Framework for Restrictions on
High Debt-To￾Income Residential
Mortgage Lending
9 November 2022

Part 1 – Introduction

1. Objectives for residential mortgage lending restrictions
   (1) This document sets out the Reserve Bank of New Zealand’s (Reserve Bank) framework for imposing restrictions on high debt-to-income (DTI) loans by registered banks to the residential property sector (DTI restrictions). Loans to the residential property sector include loans secured by owner-occupied residential property and loans secured by residential investment property. (2) The Reserve Bank has powers under Part 5 of the Banking (Prudential Supervision) Act 1989 (the Act) to register banks and undertake prudential supervision of registered banks. (3) Section 68 of the Act requires the powers under Part 5 of the Act to be exercised for the purposes of:
   (a) promoting the maintenance of a sound and efficient financial system; or (b) avoiding significant damage to the financial system that could result from the failure of a registered bank. (4) As set out in the Memorandum of Understanding between the Governor of the Reserve Bank and the Minister of Finance, dated 2 August 2021 (the Memorandum) on “Macroprudential policy and operating guidelines”, debt serviceability restrictions (DSRs) on residential mortgage lending may be deployed to address systemic risks to financial stability (see 2.1.5 of the Memorandum). DSRs set limits on lending relative to borrowers’ income. (5) As outlined in the Memorandum, DSRs may take a variety of forms, including DTI restrictions, debt-servicing-to-income (DSTI) ratio restrictions, and test interest rate floors or buffers. This document sets out the framework for DTI restrictions. If the Reserve Bank decides to introduce other types of DSRs, these will be covered in a separate document. (6) The objective of the framework set out in this document is to help maintain financial stability, by providing the Reserve Bank with the practical means of imposing restrictions on high-DTI residential mortgage lending undertaken by registered banks. Any decision to impose such restrictions will be taken within the operating guidelines for macro-prudential policy set out in the Memorandum, for the purposes of section 68 of the Act.

2. Entities subject to this policy
   This policy applies to all residential mortgage lending originated by New Zealand registered banks. However, for overseas-incorporated banks that have a branch in New Zealand, any DTI restrictions that are imposed would only apply to residential mortgage lending originated by the branch in New Zealand. Conditions of registration will be amended if DTI restrictions are to be imposed – see sections 9 and 10 of this document for further detail.

3. Conditions of registration
   Section 74 of the Act authorises the Reserve Bank to impose conditions of registration that relate
   to, among other things, the matters referred to in section 78(1)(fa) of the Act namely “risk management systems and policies or proposed risk management systems and policies”.

4. Public disclosure
   Under section 81 of the Act, the Governor-General may, on the advice of the Minister of Finance and in accordance with a recommendation by the Reserve Bank, prescribe information or data that registered banks must publish in disclosure statements.

5. Regulatory reporting
   Under section 93 of the Act, the Reserve Bank may require a registered bank to provide certain information, data or forecasts to the Reserve Bank. A notice under section 93 may specify (among other things):
   (a) the periods for which, and form in which, the information, data, or forecasts must be supplied; and (b) the time by which the information, data, or forecasts must be supplied.

6. Definitions
   For the purposes of this document, including for conditions of registration imposed under the Act,— borrowing party means a single borrower or a group of borrowers that is seeking a residential mortgage loan from a registered bank. BPR131 means the Reserve Bank of New Zealand document “BPR131: Standardised Credit Risk RWAs”, in the version applying to the registered bank in its conditions of registration. BPR133 means the Reserve Bank of New Zealand document “BPR133: IRB Credit Risk RWAs”, in the version applying to the registered bank in its conditions of registration. debt, in relation to a residential mortgage loan at the time that the registered bank provides the loan, is the total balance of the (unweighted) sum of all loan values that the borrowing party discloses they are responsible for servicing out of their income. It includes the new residential mortgage loan (and any other residential mortgage loans), personal loans (excluding buy-now, pay-later), student loans, and other debt. For the purposes of this document, business lending is excluded from debt. debt-to-income (DTI) ratio, in relation to a residential mortgage loan, is calculated by the following formula:
   debt-to-income ratio = debt income x 100 where debt and income are also defined in this section. debt-to-income measurement period has the same meaning as in the registered bank’s conditions of registration, for example, a three-month, six-month or other period. exempt, for a residential mortgage loan or an increase in the loan value of a residential mortgage loan, means the residential mortgage loan or increase is treated by the registered bank as exempt under section 11 of this document. Glossary means the Reserve Bank of New Zealand document “BPR001: Glossary”, in the version applying to the registered bank in its conditions of registration.

high-DTI loan, high-DTI lending or high-DTI residential mortgage lending means a residential mortgage loan that would lead to a borrowing party’s DTI ratio to fall into one of the DTI ranges that is restricted. IRB bank has the meaning given in the Glossary. loan value, for a residential mortgage loan,— (i) if made or provided by an IRB bank, has the same meaning as in section D3.3 of BPR133 (except that, when incorporating any off-balance sheet exposures in the loan value, the bank may apply a credit conversion factor of 100% rather than using its own EAD estimates); and (ii) if made or provided by any other registered bank, has the same meaning as in section C3.5 of BPR131. income means total gross (pre-tax) income. It includes wages and salaries, self-employment income, business income, boarder income, rental income, superannuation and other government benefits, investment income, foreign income, and other income (including commissions, bonuses, and over-time). See section 13.2 for further detail on the measurement of income. qualifying increase in mortgage loan value means an increase in loan value that is not exempt associated with a residential mortgage loan previously made by the registered bank. qualifying mortgage loan means a residential mortgage loan that is provided by a registered bank and is not exempt. qualifying mortgage loan commitment, as evidenced by the loan documents provided by the registered bank to the borrowing party, means the finalised offer given by the registered bank to a borrowing party to — (i) provide a qualifying mortgage loan; or (ii) provide a qualifying increase in mortgage loan value. qualifying new mortgage lending amount is the sum of — (i) the total of any loan values associated with a qualifying mortgage loan made by the registered bank in a debt-to-income measurement period in accordance with a qualifying mortgage loan commitment; and (ii) the total of any increases in loan value that are a qualifying increase in mortgage loan value made by the registered bank in a debt-to-income measurement period. residential mortgage loan means a loan or lending facility that — (i) has the same meaning as in the Glossary (also see section C3.2 in BPR131); and (ii) for the purposes of this document, does not include a reverse residential mortgage loan as defined in the Glossary.

Part 2 – Conditions of registration
7. Standard conditions
(1) The Reserve Bank’s policy tools within its macro-prudential framework include the use of restrictions on high-DTI loans by registered banks to the residential property sector. If the Reserve Bank implements these tools under the decision-making processes of the macro￾prudential framework, it will normally do so by imposing standard conditions of registration on all New Zealand registered banks. (2) Appendix 1 sets out the standard form of the conditions that may be imposed by the Reserve Bank. These standard form conditions are indicative only and may be different for a particular bank. However, the Reserve Bank will normally apply these standard form conditions across all registered banks in New Zealand, subject to the variations discussed in this section (subsections (3) and (5)). The Reserve Bank may, in exceptional cases, exclude a registered bank from the general application of the standard conditions. This would include the case where a bank was prevented from originating mortgage loans by its existing conditions of registration. (3) The conditions set out in subsections (1) and (2) of this section restrict the share of a bank’s new residential lending that falls within the specified higher-DTI ranges over each specified period. The restrictions will normally apply over a three-month rolling period for banks with new mortgage lending flows of more than $100 million per month, and a six-month rolling period for other banks. Conditions will normally apply from the first day of a month, and the relevant measurement period during which the restrictions would apply would be the three or six calendar months starting from that date. The subsequent measurement period would be the three or six calendar months starting one month later, and so on. (4) The Reserve Bank will use the cut-off limit of $100 million per month to determine which banks are subject to DTI restrictions on a three-month basis, and which on a six-month basis. This judgement will be made at the time that it imposes DTI restrictions, on the basis of recent housing lending data. While DTI restrictions are in place a bank may be switched from one category to the other if the Reserve Bank judges that its monthly mortgage lending has persistently fallen below or risen above $100 million. (5) The conditions set out in subsections (1) to (3) of this section will apply to each New Zealand￾incorporated registered bank as a legal entity. For branches of overseas-incorporated banks, these conditions will apply to the New Zealand business of the registered bank. These conditions will not apply to New Zealand residential mortgage lending booked in the overseas-incorporated bank in any other jurisdiction. The Reserve Bank recognises the significant burden that would be imposed by attempting to identify such lending and expects that this would be immaterial unless the bank deliberately used its New Zealand operations to facilitate it. (6) After imposing such conditions, the Reserve Bank will
keep under review the impact of the DTI restrictions on residential mortgage lending, and on the credit and housing price cycle more generally. In light of changing circumstances, the Reserve Bank may remove the conditions, or may vary them in order to tighten or loosen their settings as appropriate.

8. Anti-avoidance
   (1) A registered bank must not enter into any arrangement to avoid the DTI restrictions in its conditions of registration. (2) The following are a non-exhaustive list of activities or methods that must not be used to avoid the DTI restrictions:
   (a) providing lending primarily reliant on residential property as security, as opposed to lending that is also reliant on other sources of funds such as business cash flows, that is treated as outside the residential mortgage loan asset class and not included in debt for the purposes of this document (for example, in the corporate asset class), where the lending would be high-DTI lending if a residential mortgage loan; (b) acting as a broker for, or arranging a residential mortgage loan for, another member of the bank’s banking group, or in the case of a branch, doing so for the business of the registered bank outside New Zealand or for an associated person outside New Zealand; or (c) in the case of a branch, facilitating the drawdown of a residential mortgage loan that has been originated by the bank as part of its business outside New Zealand or by an associated person of the bank outside New Zealand. (3) The Reserve Bank recognises that the arrangements in section 8(2)(a)-(c) can in certain instances be used for legitimate business purposes, and as such is not ruling out those uses. Rather, the Reserve Bank’s expectation is that banks will not exploit or promote such arrangements to avoid the DTI restrictions. (4) The Reserve Bank will look closely at the extent to which, and over what period, any registered bank was increasing its use of such arrangements (including more prominent marketing of products based on such arrangements), measured by the total volume or as a proportion of all of its residential lending. (5) If at any point it appears to the Reserve Bank, taking into account the considerations above, that an individual bank is entering into arrangements to avoid DTI restrictions, the Reserve Bank would consider taking action against that bank. Such action could address the concern directly by varying the standard DTI conditions or by imposing an additional condition relating to DTI restrictions, or could take some other form as appropriate.

9. Variations to standard conditions of registration
   The Reserve Bank will give registered banks at least seven days’ notice of its intention to impose, vary or remove such conditions, in line with section 74(3) of the Act.

10. Transitional arrangements
    At the point that the Reserve Bank first decides to impose DTI restrictions on residential mortgage lending, the first period over which the amount of lending will be measured may be longer than the standard measurement period that will subsequently apply.

11. Exemption categories
    (1) A registered bank may treat a residential mortgage loan as exempt from the DTI restrictions only if the loan qualifies under one of the paragraphs (a) – (g) of subsection (2) below. (2) A registered bank may treat an increase in the loan value of a residential mortgage loan previously provided by the registered bank as exempt from the DTI restrictions if the increase qualifies under any of the paragraphs (e) – (g) of subsection (2) below. Kāinga Ora (a) The loan is made or will be made under Kāinga Ora’s First Home Loan scheme; Refinancing (b) A loan that is taken out or will be taken out to refinance an existing residential mortgage loan that is to the same borrowing party as under the existing loan or to a related party of the borrowing party, is secured on the same property, and the value of the new residential mortgage loan is no more than that of the existing residential mortgage loan; Portability (c) A natural person or a related party of the natural person uses the loan to purchase a residential property that the natural person intends to occupy as their principal residence, and the natural person is either currently occupying, or has occupied within six-months of the date of the new residential mortgage loan commitment, another residential property for which the natural person or a related party of the natural person is or was a borrower under a residential mortgage loan, and— (i) if the previous residential mortgage loan has been repaid, the value of the new residential mortgage loan is no more than the corresponding value for the previous residential mortgage loan at the time that it was repaid and before the application of the final payment; or (ii) the value of the new loan is no more than the corresponding value for the existing residential mortgage loan on the property that the natural person is moving out of, on the date that the new commitment is made; Bridging finance (d) The loan (bridging finance) is to enable a person to complete the purchase of a residential property (the new property) on a date before the date on which that person completes the sale of another residential property (the old property) provided that— (i) a natural person, who is either the person purchasing the new property or a related party of that person, intends to occupy the new property as their principal residence after the completion date of the sale of the old property, and has occupied the old property as their principal residence until the completion date of the purchase of the new property; (ii) the registered bank requires the bridging finance to be repaid as soon as the sale of the old property has been completed;

(iii) this exemption lasts until the date one year after the date on which the bank first committed to providing the bridging finance, and on that date the value of the increase in lending to the borrowing party arising from the bridging finance must be included in the calculation for debt-to-income measurement periods including that day; and (iv) to the extent that a residential mortgage loan is expected to remain outstanding on the new property once the bridging finance has been repaid, the calculation of the DTI restrictions must include the loan value associated with a commitment for a new residential mortgage loan, dated when the bank is first committed to providing that loan. The new loan may be treated as exempt if it meets the conditions for any of the other exemptions listed in this section; Construction loan (e) The loan, or any increase in the loan value of a residential mortgage loan previously provided by the registered bank (construction loan), meets all of the following conditions:
(i) the purpose of the loan, or of the increase in loan value, is one or more of the following:
a. to finance the construction or purchase of a new residential dwelling; b. to finance the ownership of land, or to prepare land, including the demolition or removal of existing structures on the land or provision of services necessary for using the land as residential property, where the loan is also for the purpose of financing the construction or purchase of a new residential dwelling on that land, provided that construction is expected to be completed no more than 24 months after the loan commitment date; or
c. to fund unexpected or additional costs to undertake or complete the
construction of a new residential dwelling, including cost overruns or resource or building consents; (ii) either the borrowing party committed to the construction or purchase of the new residential dwelling prior to the commencement or at an early stage of construction of the dwelling, or the borrowing party is purchasing the completed property from the original developer within 6 months of the property’s completion, or the borrowing party is purchasing the property as part of the Government’s KiwiBuild programme; and (iii) the loan, or, in the case of an increase in loan value, the full amount of the previously made loan and the increase, is secured by a mortgage over the residential property on which the dwelling will be, is being, or has been, constructed. For the avoidance of doubt, it may also be secured by mortgages over other properties;

Loan granted in error
(f) The loan, or any increase in the loan value of a residential mortgage loan previously provided by the registered bank, is a loan that may be restricted by the DTI restrictions and all of the following conditions are met:
(i) the bank committed to the loan without a full understanding of how it would affect their high-DTI lending proportions; (ii) this exemption has not been applied to any other loan in the calendar month; and (iii) the bank writes a letter to the Reserve Bank within 20 working days of the end of the calendar month to explain how the error occurred; Property remediation (g) the amount of an increase in the loan value of a residential mortgage loan previously provided by the registered bank (property remediation loan), is exempt if it meets all of the following conditions:
(i) the purpose of the loan is to fund a repair or remediation of a residential property; (ii) the bank has already provided a loan to the borrowing party, or a related party of the borrowing party, secured by that residential property; and (iii) the repair or remediation is not routine or deferred maintenance. The need for the lending for repair or remediation arises because of any of the following events:
a. an event such as a fire or natural disaster (where the insurance cover does not fully fund needed repairs); b. significant weather-tightness issues; or
c. a need to improve a building to meet currently accepted standards (e.g.
Seismic strength standards or rental property standards around matters like heating and insulation). (3) For the purposes of this section, a person is a related party of another person if:
(a) one person is a trust, or a trustee of a trust and the other person is a beneficiary of the trust; (b) one person is a company or an unincorporated body of persons and the other person is a shareholder of, or otherwise controls, the first person; or (c) one person is a natural person and the other person is the spouse, civil union or de facto partner of the first person or is the administrator of the estate of the deceased spouse, civil union partner or de facto partner of the first person.

12. Exemption guidelines
    (1) When applying the exemptions, a bank should take a “substance over form” approach, taking into account the intention of each of the exemptions, as described in this section. (2) The exemption of a loan is framed so that if a bank is unable to, or opts not to determine conclusively whether or not a particular loan commitment falls within one of the exemption categories, the loan will be a qualifying mortgage loan or qualifying increase in mortgage loan value. It is not necessary for the registered bank to exempt loans that are not restricted by DTI restrictions that meet the criteria for the exemption. (3) The exemption categories in section 11(2)(b) and (c) are intended to allow transferability of existing lending that may be restricted by DTI restrictions. For example:
    (a) Under section 11(2)(b), if a person has a loan restricted by DTI restrictions, that person will be able to switch to a different lender or to new mortgage terms on the same property, and still borrow up to the same amount without being affected by the restrictions. (b) Section 11(2)(c) allows a person who is moving house to borrow up to the same amount on the new property without being affected by the DTI restrictions, but in this case the exemption is only available where there is an intention to occupy the purchased house as a principal residence, and there is a time limit of six months on this transferability. Both of these exemptions apply only to the amounts of the old and new residential mortgage loans. That is, they exclude additional borrowing by the customer that may fall within the registered bank’s definition of loan value associated with the residential mortgage loan. If either the old or the new residential mortgage loan is in the form of a revolving lending facility, the exemption applies to the facility amount. (4) The exemption in section 11(2)(d) is intended to allow a person who is changing their principal residence to take out a bridging loan for up to one year if they have not been able to sell their existing property before completing the purchase of their new property, without the total bridging loan amount being caught within the restrictions of the policy. The DTI restrictions are intended to apply to the mortgage loan on the new property as it will be once the bridging finance has been repaid. The new loan may in turn be exempted from DTI restrictions if it satisfies the conditions for one of the other exemptions. If the person has not been able to repay the bridging loan after one year, it is treated at that point in the same way, for the purpose DTI restrictions, as it would have been treated if it had not been exempt originally. (5) The exemption in section 11(2)(e) is intended to apply where a person has firmly committed to the construction or purchase of a new residential dwelling, either prior to the commencement of the construction, when the dwelling is in the early stages of construction, or within 6 months of the completion of the development when purchasing from the original developer, and finances that construction or purchase through a residential mortgage loan. Specifically, banks should consider all of the following when applying the exemption in section 11(2)(e):
    (a) the exemption covers the full amount of the financing needed to complete the construction or purchase of the property, including staged draw-downs and any increases in the loan value to cover any overrun in the cost of construction compared to the original construction budget. If the total financing is structured as a series of separate loans, the

exemption is applicable to each separate loan in the series. The exempt financing may also be used to fund costs necessary for the construction of the dwelling, such as building and resource consents, architects’ and engineers’ fees, and the provision of vehicle access and essential services such as water and sewerage; (b) the value of the section may be included in the exempt financing only where the loan finances both the section and the new residential dwelling. For example, financing for builders’ land/build packages is exempt, provided the buyer meets the other criteria for the exemption. The 24 month deadline means that the exemption is not available for financing speculative purchases of sections where there is no planned start date for construction of a dwelling on the section; (c) the new residential dwelling may be constructed on a section occupied by an existing dwelling. The exemption will cover financing to demolish or remove an existing building; (d) financing will not be considered to fall within any of the purposes of section 11(2)(e)(i) where the purpose of the financing is the renovation, remediation or extension of an existing property or the purchase of items (such as movable furniture or appliances) that are not normally retained in a property when it is sold; (e) the bank should use a common sense approach to determining whether the property is being purchased from the original developer within 6 months of the property’s completion, potentially inspecting code compliance certificates or similar documents; (f) if not purchasing from the original developer within 6 months of the property’s completion, the borrowing party must commit to the purchase of the dwelling by an early stage in the construction of the dwelling. This allows for the case where work may have been undertaken to prepare the site for development prior to the buyer committing to the construction of the dwelling. For example, the following may occur before the borrowing party makes a commitment:
(i) obtaining resource or building consents to undertake the construction; (ii) providing essential services to the site, such as a driveway, and connections to utilities; (iii) preparation of the site, such as clearing or earth works, and putting in place the building’s substructure and framing. (6) The exemption in section 11.2(f) is designed in recognition of the possibility that a single loan made in error by a bank with relatively low levels of residential mortgage origination within one of the speed limit categories could lead to a breach of the speed limit that would not be particularly material in terms of economic impact. It allows the bank to exempt one loan per month on the grounds that the loan occurred in error, to make relatively minor breaches of the condition less likely. Because the exemption is designed to allow for infrequent errors, the Reserve Bank would be concerned if a bank used this exemption frequently or for very large loans relative to what the bank usually makes. (7) The exemption in section 11.2(g) is intended to apply when a bank and/or borrowing party are aware that a property that is collateral for the loan requires major non-routine work to ensure

it remains habitable and safe and thus sound collateral for the loan. Specifically the following may apply:
(a) the exemption covers the full amount of financing needed to make the property habitable and safe less any other sources of financing that are available specifically for the remediation. Other sources may include insurance pay-outs, or funding or settlements provided by other entities (in the case of a weather-tight home, this could include Government, local Government or people involved in the initial construction); (b) the foreseeable replacement of parts of a dwelling should be regarded as routine work. 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, or repainting as
part of re-cladding a property, would be non-routine work;
(c) the exemption should not be used to bring buildings up to the current building code unless generally accepted standards require that for the building to be considered habitable and safe; (d) the exemption will not 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. (8) The definition of the term related party of another person in section 11(3) and the way it is used in the exemptions in section 11(2) are intended to capture commonly used ownership vehicles for residential property, and cases where ownership may be transferred without any actual new lending occurring. For example, in the case of loan refinancing on the same property, the exemption allows cases such as a person transferring ownership to their spouse (or vice versa), ownership being transferred into a family trust, or ownership transferring from the estate of a recently deceased person to their widow(er). (9) In the exemptions which involve moving house, a key requirement is that there is one natural person who was living in the former house and is living in the new house, but beyond that, the wording allows a range of alternative combinations of owner, borrowing party and occupier, provided that they are all related as per the definition of related party of another person.
13. Other requirements
13.1. Qualifying new mortgage lending amount
Overview
(1) The DTI restrictions apply to every qualifying new mortgage lending amount that the registered bank creates during each debt-to-income measurement period. A qualifying new mortgage lending amount can arise from a commitment to provide a new residential mortgage loan, a commitment to provide an increase on an existing residential mortgage loan, or an increase that arises in the loan value associated with a residential mortgage

loan without going through a formal commitment process.
(2) Measurement of the amounts is based on the loan value associated with the residential mortgage loan, as used by the bank for the purpose of its capital adequacy framework, or in the case of overseas-incorporated banks, for the disclosure of mortgage lending by DTI ratio. If the qualifying new mortgage lending amount does not arise from a commitment for a new mortgage, the amount is measured as the increase in the loan value associated with the mortgage. (3) Qualifying new mortgage lending amounts do not include commitments to provide a new residential mortgage loan, or increases in the loan value of an existing loan, that the bank treats as exempt under one of the exemption categories. Timing—commitments for new mortgages (4) For the purposes of this document, a bank enters into a qualifying mortgage loan commitment for a new residential mortgage loan when the bank offers an applicant the loan in final form. This is typically the day on which the bank sends the loan documentation to the applicant’s solicitor, or an equivalent stage in the process if the applicant is not using a solicitor. By this point the credit risk should be regarded as being the same as if the asset was already on the balance sheet. (5) Commitments do not include loan pre-approvals that may or may not lead to a final offer of a loan. Necessary (but not sufficient) conditions for a qualifying mortgage loan commitment for a new residential mortgage loan are that a specific property has been identified and that an amount has been agreed for the loan that the customer will draw down or, in the case of a lending facility, for the facility limit. Timing—increases in mortgage lending (6) In cases where an increase in lending on an existing residential mortgage loan requires amendment to the loan or mortgage documentation, the date on which the increased loan amount applies corresponds to that for a new mortgage loan, namely the date that the bank sends the loan documentation to the borrowing party’s solicitor, or the equivalent stage in the process. In other cases, the increase in lending over the debt-to￾income measurement period is the total increase in the drawn-down balance from the beginning to the end of the period. Relation to switch-on date (7) If the registered bank has entered into a qualifying mortgage loan commitment before the date on which the DTI conditions of registration come into force (the “switch-on date”), the conditions do not apply to that commitment. Conversely, if a bank has given a customer a mortgage pre-approval before the switch-on date of the conditions, but the pre-approval does not result in a qualifying mortgage loan commitment until after the switch-on date, the conditions do apply to that commitment. Treatment of loan draw-downs (8) In cases where a new residential mortgage loan is included in the DTI calculation in respect of its commitment date, or where a top-up on an existing residential mortgage loan requires updated documentation in line
with subsection (4) of this section, the date (if any)

on which amounts are subsequently drawn down is not relevant. In the case of other increases in existing residential mortgage loans, the relevant date (or dates) are those of actual amounts being drawn down during the period. (9) Committed but undrawn amounts on an existing mortgage lending facility that was established before any period defined in conditions of registration are not included in new commitments for that period. Amounts drawn down during the period under revolving mortgage facilities are not included as an increase in lending provided the loan balance remains within the facility limit. If the borrowing party requests an increase in the facility limit, the amount of the increase is included in the DTI calculation on the date determined as above. Loans not included (10) To avoid any doubt, a Kāinga Whenua loan provided by Housing New Zealand is not a residential mortgage loan. However, Kāinga Whenua loan should be included in total debt if a borrowing party takes out a residential mortgage loan.
13.2. Income
(1) Banks are expected to undertake their standard lending assessment processes when verifying and estimating a borrowing party’s total gross income, which includes taking reasonable steps to capture all material and eligible sources of income. Banks should also adhere to any relevant regulatory requirements (such as the Credit Contracts and Consumer Finance Act 2003) throughout this process. (2) If any sources of income are reported as a net figure, then they should be re-grossed assuming that marginal personal tax rates apply. (3) If any sources of income vary over a period of time, then an estimate of the borrowing party’s variable income can be used in the calculation of total gross income for the purposes of this document. For example, variable income may include: bonuses, commissions, investment income, and over-time. It is expected that banks follow their standard lending assessment processes when deriving an estimate of the customer’s variable income, whilst adhering to other regulatory requirements. (4) The Reserve Bank may decide to apply weightings to any category of income as part of the calibration of DTI restrictions. Any application or adjustment of weightings would be made via changes to conditions of registration.
13.3. Guarantors
(1) If a guarantor is being excluded when computing income of the borrowing party (for example, the guarantor is not expected to service the new residential mortgage loan), banks must not include their debts in the total debt of the borrowing party. (2) If guarantors are providing a guarantee that reduces the loan-to-value ratio of the new residential mortgage loan of the borrowing party, but it is expected that the borrowing party will service the whole residential mortgage loan, the whole residential mortgage loan must be included when computing the borrowing party’s total debt.

13.4. Business debt and business income
(1) Business income must be included when calculating a borrowing party’s income and includes all taxable business profits, regardless of whether profits are taken as personal income or retained in the business. This will be based on gross earnings, after business expenses and serviceability costs related to business debt. For example, to calculate business income available for serviceability for the purposes of this document, banks must take the net profit after tax, subtract serviceability costs (i.e. principal and interest) related to business debt, then re-gross for tax assuming that marginal personal tax rates apply. (2) If a business has multiple shareholders, then business income must be apportioned according to the borrowing party’s equity share. (3) Business debt, including business debt secured by residential property, must be excluded from the calculation of total debt.
13.5. Complex lending situations
(1) Complex lending situations arise where it may be difficult for banks to calculate a DTI ratio for a borrowing party. For example, a Bank may provide a residential mortgage loan to a borrowing party that consists of multiple borrowers, where some (or all) of the borrowers may be a part of complex structures such as trusts and look-through companies. (2) Banks must seek to include all the debts of the borrowers whose income is included in the DTI calculation for the borrowing party, where a single DTI ratio must be calculated for each borrowing party. A borrower can belong to multiple borrowing parties. (3) If a borrower in the borrowing party is associated with a trust, look-through company, or other structure that holds residential mortgage debt, then this debt must be included when computing their total debt (or the borrowing party’s total debt) if they are required to service the residential mortgage debt associated with the trust, look-through company, or other structure. (4) If there are multiple borrowers in the borrowing party and they share all of the same properties, then all debt and income from each borrower in the borrowing party must be aggregated when calculating the DTI ratio of the borrowing party. (5) If there are multiple borrowers in the borrowing party and they do not share all of the same properties, then all debt that each borrower in the borrowing party is legally responsible for must be aggregated when calculating the total debt of the borrowing party. This includes the full amount of any joint debt that the borrower may have outside of the borrowing party. For example, if A owns a property with B, then wants to purchase a property with C (separate from B), then A’s entire joint debt with B is to be included when calculating the DTI ratio for A and C. (6) The bank must take reasonable steps to verify the amounts of all actual or intended loans that the borrowing party holds, including any joint debt as described in subsection (5). This may involve obtaining copies of recent loan statements from the borrowers in the borrowing party.

(7) If there are multiple borrowers in the borrowing party and they do not share all of the same properties, then income from each borrower in the borrowing party must be aggregated when calculating income of the borrowing party. Income that does not belong or is attributable to the borrowing party must only be included if it will be used to service the new residential mortgage loan of the borrowing party. For example, if A owns a property with B, then wants to purchase a property with C (separate from B), then B’s income is not to be included when calculating the DTI ratio for A and C. The exception to this is if A and B share a rental property, then the entire rental income is to be included. (8) If the DTI ratio of the borrowing party is unable to be calculated due to the complexities involved, then the associated loan value can be allocated to the speed limit at the banks discretion.
13.6. Verification of third-party information
(1) The registered bank will need to obtain adequate verification of third-party information in any of the following circumstances:
(a) if the bank wishes to exempt a residential mortgage loan from the DTI restrictions using the refinancing exemption (section 11(2)(b)) or the loan portability exemption (section 11(2)(c)), and if the bank has not been the provider of the previous residential mortgage loan, the bank will need to obtain information from the borrowing party on the previous loan amount; (b) if the bank wishes to exempt a residential property from the DTI restrictions using the loan portability exemption (section 11(2)(c)) or the bridging finance exemption (section 11(2)(d)), the bank will need confirmation that the individual in question has occupied the old property and will occupy the new property; or (c) if the bank wishes to exempt a residential property from the DTI restrictions using the construction loan exemption (section 11(2)(e)), the bank must determine that the loan is for one of the purposes in 11(2)(e)(i) and that the borrowing party has firmly committed to the construction or purchase of the property prior to the commencement of, or at an early stage in, construction of the dwelling. Verification of third-party loan amounts (2) The bank must take reasonable steps to verify the amounts of all actual or intended loans from a third party. For example, an acceptable approach would be to obtain copies of recent loan statements from the borrowers in the borrowing party. If the loan is an intended rather than an existing loan acceptable verification would include confirmation from the intended lender of the amount of the loan that the borrowing party has applied for. This is to ensure that the bank has a clear view of the borrowing party’s total debt.

Part 3 – Requirements for public disclosure and regulatory
reporting
14. Public disclosure requirements
(1) A registered bank must comply with the Reserve Bank’s requirements for public disclosure in relation to DTI restrictions. These requirements apply to branches of banks incorporated overseas as well as to New Zealand-incorporated banks. Further, directors of a registered bank, and the New Zealand chief executive officer for a registered bank incorporated overseas, must attest in disclosure statements that the registered bank has, at the reporting date and over the accounting period, complied with the requirements set out in the bank’s conditions of registration. (2) The requirements for public disclosure are set by Orders in Council made under section 81 of the Act. (3) The Reserve Bank intends to review whether DTI-related disclosure requirements should be implemented in the future in light of experience with the new regulatory reporting on DTI restrictions.
15. Reporting to the Reserve Bank
(1) The Reserve Bank collects a breakdown by DTI of banks’ residential mortgage lending in the new commitment survey. (2) The Reserve Bank uses these reports to monitor credit conditions and the build-up of credit risk in the housing market. During periods when DTI restrictions are in place, these reports will be used to help monitor compliance with the restrictions, and to assess other impacts they may have, for instance on the availability of credit to small businesses. (3) While this data is provided to the Reserve Bank on a confidential basis, the Reserve Bank publishes a subset of the data aggregated across banks.

Appendix 1: Standard conditions of registration
The following are the standard conditions of registration for quantitative DTI restrictions and do not necessarily represent the actual conditions applying to a particular bank. Conditions for locally incorporated registered banks (1) That, for a debt-to-income measurement period: the total of the bank’s qualifying new mortgage lending amount in respect of residential mortgage loans with a DTI ratio of more than x, must not exceed xx% of the total of the qualifying new mortgage lending amount in respect of residential mortgage loans arising in the debt-to-income measurement period. (2) That the bank must not provide a residential mortgage loan unless the terms and conditions of the loan contract or the terms and conditions for an associated mortgage require that a borrower obtain the registered bank’s agreement before the borrower can grant to another person a charge over the residential property used as security for the loan. In these conditions of registration — DTI, debt-to-income measurement period, qualifying new mortgage lending amount, and residential mortgage loan have the same meaning as in the Reserve Bank of New Zealand document entitled “Framework for Restrictions on High Debt-To￾Income Residential Mortgage lending”:
debt-to-income measurement period means—
(a) the three calendar month period ending on the last day of [month year]; and (b) after the period mentioned above in paragraph (a), a period of three calendar months ending on the last day of the third calendar month, the first of which ends on the last day of [(month+1) year]. [Alternative for banks with lower mortgage lending: debt-to-income measurement period means a period of six calendar months ending on the last day of the sixth calendar month, the first of which ends on the last day of [month year]] Conditions for overseas incorporated registered banks (1) That, for a debt-to-income measurement period, the total of the business of the registered bank in New Zealand’s qualifying new mortgage lending amount in respect of residential mortgage loans with a DTI ratio of more than x, must not exceed xx% of the total of the qualifying new mortgage lending amount in respect of residential mortgage loans arising in the debt-to-income measurement period. (2) That the business of the registered bank in New Zealand must not provide a residential mortgage loan unless the terms and conditions of the loan contract or the terms and conditions for an associated mortgage require that a borrower obtain the registered bank’s agreement before the borrower can grant to another person a charge over the residential property used as security for the loan.

In these conditions of registration — DTI, debt-to-income measurement period, qualifying new mortgage lending amount, and residential mortgage loan have the same meaning as in the Reserve Bank of New Zealand document entitled “Framework for Restrictions on High Debt-To￾Income Residential Mortgage lending”:
debt-to-income measurement period means—
(c) the three calendar month period ending on the last day of [month year]; and (d) after the period mentioned above in paragraph (c), a period of three calendar months ending on the last day of the third calendar month, the first of which ends on the last day of [(month+1) year]. [Alternative for banks with lower mortgage lending: debt-to-income measurement period means a period of six calendar months ending on the last day of the sixth calendar month, the first of which ends on the last day of [month year]]

Appendix 2: Illustrative example of calculation of DTI
restrictions
The following is an example of how DTI restrictions would apply in a particular case. This example is not calibrated to the actual requirements, but is for explanatory purposes. Assume that the condition of registration is specified as such:
That the total of the registered bank’s qualifying new mortgage lending amounts for residential properties with a DTI ratio of more than 6 must not exceed 15% of the total of the qualifying new mortgage lending amounts arising in the debt-to-income measurement period. Time period: the three calendar months from 1 February 2023 to 30 April 2023 inclusive. A bank takes on 1,500 commitments to provide new residential mortgage loans during this period (that is, the date on which each of these becomes a commitment in terms of section 13.1 of this document falls on a date within the three months). Of these commitments, 120 are for mortgage loans falling within the exemptions in section 11 (i.e., a Kainga Ora First Home Loan). Of the 1,380 qualifying mortgage loan commitments, 190 have DTIs of 6 or more. The total loan value associated with the 1,380 loans is $700 million. The total loan value associated with the 190 loans is $110 million. In this case the bank breaches the condition that 15% of the total of the qualifying new mortgage lending amount must not exceed a DTI ratio of more than 6. The loan value associated with DTI ratios over 6 ($110 million) is 15.7 percent of the total qualifying new mortgage lending amount ($700 million), whereas the maximum allowed is 15 percent).