A client buying a new home needs short-term finance to settle before their current home sells. The extra amount will be repaid from the sale proceeds. How is that short-term amount treated under the Reserve Bank's DTI rules?
Correct Answer
C) It is bridging finance, which is exempt from the DTI restrictions.
The Reserve Bank lists bridging finance among the situations where DTI rules do not apply. Its worked example excludes the bridging portion, to be repaid when the old home sells, from the DTI calculation. Whether a bridging loan is offered remains the bank's decision.
Why This Is the Correct Answer
Temporary finance repaid from the sale of the existing home is bridging finance, which is exempt.
Why the Other Options Are Wrong
Option A: It is added to total debt and makes the loan high-DTI for its full term.
Bridging finance is on the Reserve Bank's list of exemptions, so the bridging portion is left out of the DTI calculation.
Option B: It is exempt only if the bank is a participating First Home Loan lender.
The bridging exemption does not depend on the lender taking part in the First Home Loan scheme.
Option D: It is allowed only for investors, because owner-occupiers cannot use bridging finance.
Nothing in the DTI rules limits bridging finance to investors; any bank may choose to offer it.
Background Knowledge for Finance
Source: https://www.rbnz.govt.nz/education/explainers/dti
Exam Tip for Finance
Memorise the shared LVR/DTI exemptions: KΔinga Ora loans, like-for-like refinancing, portability, bridging, remediation, and new builds.
Common Mistakes to Avoid on Finance Questions
- β’Counting the whole bridging amount as permanent debt in the DTI ratio.
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