LVR and DTi, what and why?

The Reserve Bank’s tool kit includes macroprudential tools such as Loan to Value Ratio (LVR) and Debt to Income (DTi) restrictions, designed to maintain financial system stability. These rules limit how much buyers can borrow relative to a property's value, helping to prevent risky lending and housing bubbles.

By Brian Coogan - Infinance

Loan to Value Ratios were first introduced in October 2013 in response to rapid house price growth and sharp increases in low deposit loans, having an immediate effect in dampening house price inflation. They were removed in April 2020 in response to Covid-19 stimulus measures then reinstated in March 2021 to stem the sharp correction taking place.

Mostly they are there to support stability in the housing market and reduce the risk of sharp corrections while providing a buffer in the event of a downturn.

Set at 80% for owner occupied and 70% for investors, there are exemptions for the likes of first home buyers who can typically borrow up to 95% and construction loans at 90%.

Just to add confusion, there are also speed limits that allow 20% of owner occupier and 5% of investment property loans able to be written above those limits, allocated as available at time of application.

Debt to Income Ratios on the other hand place a limit on how much total lending you can have against your income, set at six times the income of owner occupiers and seven times income of investors. It includes all lending, so say you have a $100k income, you could have six times that or a $600k mortgage but if you also have a $20k car loan and $5k credit card limit at time of application you could have a $575k mortgage. A 20% speed limit also applies.

Ultimately, they work together to minimise financial stress in the housing market.

“Dreams, if they are any good, are always a little bit crazy” – Ray Charles

Disclaimer: Commentary is general in nature and not to be considered financial advice.