What Are Debt-to-Income Ratios (DTIs) - and Why Should Investors Care?

Lending is the most crucial piece in the puzzle for most investors, so it's important to understand how debt-to-income ratios will affect you.

In recent years, the conversation around Debt-to-Income ratios (DTIs) has become increasingly important in the New Zealand lending landscape.

While DTIs aren’t yet a formal rule imposed by the Reserve Bank, they are already being applied by many banks behind the scenes as part of their lending criteria, especially for property investors.

Understanding DTIs can make or break your ability to scale a portfolio, or even secure that first investment property.

What Is a Debt-to-Income Ratio?

A debt-to-income ratio is exactly what it sounds like: a measure of how much debt you’re carrying relative to your gross income.

Banks use it to determine how much additional lending you can take on. For example, suppose a lender applies a DTI cap of 7.

In that case, your total borrowings, including mortgages on your home and any rental properties, can’t exceed 7 times your household’s gross annual income (plus a portion of rental income from properties).

How Rental Income Is Treated in DTI Calculations

It’s not just about your salary. Banks also factor in rental income from properties, but they discount this to account for vacancies and risk:

• New build properties: Up to 80% of the expected rental income is counted
  

• Existing properties: Usually, only 70% of the rental income is used
  

That means if you’re buying an existing property, the bank is more conservative in what it considers as useable income.

Find out how much your mortgage repayments are on an investment property

Why Do DTIs Matter for Property Investors?

DTIs can become a growth bottleneck, especially for investors with an existing portfolio. If your rental returns are solid but your overall debt load is high relative to your income, you may hit a lending wall, regardless of your equity.

For first-time investors, DTIs are a useful guideline but not necessarily a barrier. If your personal mortgage is small (or paid off), you may still qualify for a solid lending amount.

Banks are essentially asking: Can this person handle more debt, based on what they earn?

How to Calculate Your DTI-Based Borrowing Power

Here’s a quick way to estimate how much more you can borrow under a DTI cap:

(Gross Household Income + Rental Income) x DTI

- Existing Debt

= Borrowing Power

Let’s run an example.

Example:

• Household income: $150,000
  

• Estimated rent from proposed property: $25,000
  

• Current mortgage debt on owner-occupied home: $300,000
  

• DTI: 7

(150,000 + 25,000) x 7 = $1,225,000

– 300,000

Borrwing Power = $925,000

In this scenario, the investor could borrow up to $925,000, which becomes their investment property budget.

Don't want to calculate your budget by yourself? Click on this link to use our affordability calculator

The DTI vs. LVR: What's the Difference?

It’s easy to confuse DTI with LVR (Loan-to-Value Ratio), but they target different risks:

• LVR restricts how much you can borrow based on the value of the asset (e.g., 80% of a property’s value)
  

• DTI restricts how much you can borrow based on your income
  

LVR protects banks from over-lending on overpriced homes. DTI protects borrowers from over-leveraging relative to their earnings.

Think of it this way: LVR is about the property, DTI is about the borrower.

Are DTIs Coming to New Zealand Officially?

The Reserve Bank of New Zealand (RBNZ) has signaled that DTI limits could be introduced formally in the near future.

The rationale? To cool housing market pressures, curb investor speculation, and protect financial stability.

Banks are already factoring them in, so it pays to get familiar now, before they're official and potentially more restrictive.

How to Improve Your DTI Ratio

If you're close to hitting your DTI cap, here are a few strategies to tip the scales in your favour:

1. Increase household income – Promotion, secondary income, and partner’s income all help
   

2. Pay down existing debt – Especially high-interest or non-property loans
   

3. Buy new builds – More of the rental income is counted toward your income
   

4. Use interest-only lending – This lowers monthly outgoings, freeing up serviceability (check if your bank allows it)
   

5. Partner with someone – Joint investments can combine incomes and increase borrowing capacity (but get legal advice first)
   

6. Get a boarder - if you have a spare room in your house, you can rent this out and produce more income for yourself
   

Final Thoughts: The Best Investment Is the One You Can Fund

Property investing starts with finance. No matter how good the property looks on paper, if the lending doesn’t work, the deal doesn’t happen.

Speak with our partners at The Finance Factory to understand property finance.

Knowing your borrowing capacity under a DTI model lets you filter properties smarter, negotiate with confidence, and move faster when the right deal appears.

As banks tighten criteria, understanding tools like the debt-to-income ratio isn’t just handy, it’s essential.

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