If used, the tool could stop 2000 owner-occupiers and 9000 investors a year from buying properties.

The Reserve Bank wants to be able to stop people taking out mortgages that are too big compared to their incomes.



It wants debt-to-income restrictions (DTIs), which limit the amount that people can borrow to a multiple of their income, added to its macroprudential toolkit, alongside loan-to-value (LVR) restrictions.



The restrictions are used in other markets around the world, such as Britain, where borrowers must have a loan no bigger than 4.5 times their income. The Reserve Bank is suggesting a limit of five times.



The size of New Zealand mortgages compared to incomes has increased sharply over the past 30 years. The Reserve Bank said increases since 2014 partly reflected the drop in interest rates over that time, but it was possible that rates could rise again in future.

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Data shows that among New Zealand's five biggest banks, nearly 60 per cent of Auckland lending now involves a DTI ratio of more than five. Property investors were most likely to have borrowed more compared to their incomes.

MAARTEN HOLL/FAIRFAX NZ The Reserve Bank is asking for feedback on its debt-to-income consultation.

The Reserve Bank has released a consultation paper, in which it says it would not use DTIs in the current market conditions, but they could be a good option in the future.

If they were deployed, they could stop 2000 owner-occupiers and 9000 investors a year from purchasing properties.

The Reserve Bank said it would prefer a speed limit approach, allowing banks to lend a proportion of their loans to high-DTI borrowers - perhaps 20 per cent, compared to 45 per cent nationwide at present.

There could also be exemptions for first-home buyers wanting to buy a relatively low-priced house, or a newly built one. They could be allowed to buy houses below the current HomeStart price caps of $600,000 in Auckland and $400,000 to $500,000 elsewhere without damaging the efficacy of the policy, the bank said.

The bank said DTI limits would reduce financial distress in the event of a fall in house prices because homeowners would retain more equity in the property, reduce the magnitude of an economic downturn and help to constrain house price rises.

It wants feedback on the risk posed by high-DTI lending and the potential for a limit to offset that, alternative options and desirable design features for any DTI policy.

The exact nature of any limit applied would depend on the circumstances and further policy development.

The Reserve Bank said borrowers with large mortgages compared to their incomes did not have much money left for anything else, particularly if interest rates were to rise.

It said, if mortgage rates were to rise to 8 per cent or 9 per cent again, a typical high-DTI first-home buyer would not have enough money left over after the loan was paid to cover their essential household spending.

"Finally, while New Zealand does not have a class of lending described as 'sub-prime', as shown in the next section, it is clear that debt service ratios have become substantially larger for some NZ borrowers than would be allowed in a prime loan in the United States."

It said some banks had system problems that meant they were unable to capture all the income details used to pass the servicing test when calculating DTIs.

Finance Minister Steven Joyce welcomed the consultation.

"The use of debt-to-income ratio restrictions would be a significant intervention in the housing market, so it's important that all interested parties have their say during this consultation period."