The Reserve Bank has set maximum DTI lending limits that banks must follow from 1 July 2024.
DTI is the ratio of your total home loan debt compared to your gross annual income.
New maximum DTI limits:
- Owner-occupied borrowers: max 6 times your gross income
- Property investors: max 7 times your gross income
Banks may have minor flexibility to exceed this, but it’s very limited and not to be relied on.
What Does This Mean in Practice?
If your combined household income is $150,000/year before tax, you can borrow up to:
- $900,000 for your own home (6 x $150k)
If you are a property investor with $100,000/year rental income, max borrowing is:
- $700,000 for investment properties (7 x $100k)
If you own both owner-occupied and investment properties, incomes are combined and the limits applied accordingly.
Important Notes
- DTI caps are not the only factor. You still need to meet the bank’s other criteria: affordability (repayment ability under stress tests), and Loan to Value Ratio (LVR) limits.
- The bank’s affordability checks use a stress interest rate around 9% to ensure you can afford repayments if rates rise.
How Will This Affect You?
- Currently, interest rates are high, so banks stress test loans at about 9%, meaning borrowers usually qualify for around 4.5 to 5.5 times their income anyway.
- The 6x DTI cap will mostly affect borrowers if interest rates fall substantially (more than a 1.5% drop). So, for now, it’s not restricting borrowing much.
- Property investors may feel the impact sooner because banks’ calculators already allow borrowing close to 7x income.
Summary
- The DTI limits are new guardrails to prevent over-borrowing as interest rates fall in the future.
- For most borrowers today, it won’t change much due to high interest rates and stress testing.
- If rates drop significantly, these caps will be the new maximum borrowing limit regardless of affordability calculations.
- If you want to understand exactly how this affects your borrowing, I can help you run the numbers.
