(Bloomberg) -- New Zealand’s central bank will limit the amount of money banks can lend for house purchases to six times a borrower’s annual pre-tax income. 

The Reserve Bank will activate the debt-to-income (DTI) restrictions on local lenders from July 1 as it seeks to reduce the build up of high-risk lending in the financial system, Deputy Governor Christian Hawkesby said Tuesday in Wellington. At the same time, existing loan-to-value ratio (LVR) restrictions will be loosened, he said.

The DTI rules are aimed at reducing the probability of a wave of household defaults in the event of an economic slump. The existing LVR rules, through which the RBNZ limits mortgage lending to borrowers with a low deposits, are designed to reduce bank losses if a default occurs.

“Both act as guardrails reducing the build-up of high-risk lending in the system,” Hawkesby said. “Having both the DTI and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system. Therefore, activating DTIs means that we can ease LVR settings too.”

The new settings allow banks to make 20% of new owner-occupier lending to borrowers with a DTI ratio exceeding 6, and 20% of investor lending to borrowers with a DTI ratio exceeding 7, the central bank said.

LVR limits will be eased to allow 20% of owner-occupier lending, up from 15% currently, to borrowers with an LVR greater than 80%. Banks will also be able to have 5% of investor lending to borrowers with an LVR greater than 70%, up from 65%.

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