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Wednesday November 10th at 12pm

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Banks introduce new mortgage lending restrictions

In June this year, the Reserve Bank received approval for a new tool to rein in house prices and control debt levels: debt-to-income (DTI) ratios.

Now, some of the banks have decided to move first. BNZ has introduced a DTI for all its borrowers, and ASB has confirmed that it, too, is now applying DTI restrictions.

How does it work?

Debt-to-income ratio limits set out a maximum loan amount based on your income level. BNZ has applied a DTI limit of six, meaning that you can borrow a total of six times your income.

For example, if you earn $100,000 a year, your total home loan would be limited to $600,000. Say you were putting down a 20% deposit, that would mean you could purchase a home worth a maximum of $750,000. (With a 10% deposit, the maximum house price would be around $667,000.)

What will this mean for homebuyers?

This will make it more difficult for buyers to stretch themselves into a large mortgage, which has recently been one an important factor for those trying to get into New Zealand’s expensive property markets. RBNZ data show 25% of first-home buyers are borrowing at DTIs over six, rising to 37% in Auckland.

However, the shift toward using DTIs is also likely to be another dampening factor for house prices, particularly when combined with rising interest rates. It may help to lower prices or slow growth, which could mean house prices aren’t racing out of reach as first-home buyers try to save.

What about property investors?

Property investors are subject to the same DTI restrictions. Banks will add rental income to your personal income, but in most cases a ‘haircut’ is applied, usually at 25%. This means if your rental property earns $30,000 a year in rent, the bank would subtract $7500 as a buffer for rates, insurance and other costs. In total, your rental would add $22,500 to your income, then the bank would multiply the total by six to find a loan limit.

This may limit your borrowing significantly. It could also be important when you go to either borrow more, or refinance a loan with your bank. It’s possible they will want to bring your total lending into line with their DTI restrictions.

Talk to us about your financial position

We’re here to chat with you about your finances and lending – it can be tougher for self-employed people to secure loans, but we can work with you to present your business revenue and salary (or drawings) in the best possible light for your prospective lender.

Just get in touch, we’d love to hear from you.

Working from home expenses, reimbursements, and tax

Employees increasingly work from home, whether part- or full-time, or during lockdowns. It’s raised questions about how to reimburse employees for associated costs and whether businesses can claim deductions for reimbursements.

Inland Revenue guidance on the tax treatment bundles in increased household costs, employees’ work use of telecommunications devices and plans, and where employees have purchased furniture or equipment to enable them to work from home effectively.

You can reimburse employees who use their own telecommunications tools and/or usage plans for work (even where the employee is not required to work from home). The tax exempt amount of the reimbursement is calculated in proportion to work related usage.

Where you provide phones or devices used by an employee for work, the cost of the device and usage plan is deductible. Be aware of FBT implications if the employee also uses the device for their own use.

Employees may need to buy office furniture or equipment to enable them to work effectively from home. If you wish to reimburse an employee for these, your options for calculating tax exempt reimbursements are:

• safe harbour options stating upper limits for furniture and equipment, and for telecommunications equipment or

• the reimbursement option, where allowable tax exempt reimbursements are calculated in proportion to work use

The reimbursement option requires you to identify the cost of the asset and whether the asset is being used exclusively or principally for employment or principally for private use. For some assets you may also need to calculate relevant depreciation loss.

When you reimburse employees for equipment they need for work, you may claim those as tax deductions. If calculating reimbursements proportionate to work use, keep records of how you arrived at that.

We can talk you through how the guidelines apply to your business, as well as calculating and documenting reimbursements.

For more information, download the guide.

COVID-19 Business Support – updated

The Government has announced another round of Resurgence Support Payments. Contact us now if you have questions or would like help with an application.

We have been finding some clients that are eligible have not applied, which means they are missing out on funds they could be accessing.

See the FAQ here and then get in touch.