In its advice to the Government the Reserve Bank says it considers a DTI limit will be a complementary tool to the mortgage loan-to-value ratio (LVR) restrictions.

Finance Minister Grant Robertson says he retains the view that the development and design of any debt serviceability tool such as a DTI limit should apply only to investors.

The Government has agreed to the Reserve Bank restriction but only if it minimises the impact on first home buyers if it is implemented.

If it is ever used, the restriction will cap how much a person can borrow based on their income up to a certain multiple.

In a statement the Reserve Bank and Robertson say they have agreed to add DTI restrictions to the bank’s Memorandum of Understanding (MoU) on macro-prudential policy.

Last month, the Reserve Bank provided advice to the minister on debt-to-income ratios and interest-only mortgages.

Its analysis found debt serviceability restrictions, such as a DTI limit, are likely to be the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability.

The analysis also showed any such restrictions would impact investors most powerfully while having limited impact on first home buyers.

The Reserve Bank says DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default.

“We will now work with the Treasury to update the wording for the MoU, which will need to be approved by the minister,” says Reserve Bank governor Adrian Orr.

“Although we do not have a remit to target house prices directly, our financial policy tools can help to ensure prices do not deviate too far from sustainable levels,” says Orr.

He says the Government has already put in place a number of measures to cool the housing market and it's important to give these initiatives time to assess their impact.

“However, we believe that a ‘sustainable house price’ is the level the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply and interest rates.”

Orr says over the coming months the Reserve Bank will be discussing with industry the feasibility of implementing a DTI limit and other debt servicing restrictions as part of its financial stability toolkit.

Any decision on implementing debt serviceability restrictions will be preceded by a full public consultation process, along with a Regulatory Impact Assessment, he says.