Homeowners want to top up their existing mortgage to add a bedroom to their house. A salesperson tells them construction lending is exempt from DTI limits. According to the Reserve Bank, is the salesperson right?
Correct Answer
A) No; the exemption covers building or buying a new home, not extending one.
The Reserve Bank's DTI explainer lists construction loans as exempt, meaning constructing a new home or buying a newly built home from the developer within 6 months of completion. Its worked example says the exemption does not apply to an extension of an existing house. A top-up for an extension is new debt included in the DTI calculation.
Why This Is the Correct Answer
An extension is not construction of a new home, so the top-up counts toward the DTI ratio.
Why the Other Options Are Wrong
Option B: Yes; any lending for building work on a home is exempt from DTI limits.
The Reserve Bank says the construction exemption applies only to building or buying a newly built house, not to an extension of an existing house.
Option C: Yes; a top-up of an existing loan is treated as refinancing and exempt.
Refinancing is exempt only where the new loan does not exceed the original loan value; a top-up adds new borrowing.
Option D: No; top-ups are banned outright for borrowers already above the DTI threshold.
DTI rules are a speed limit, not a ban; the top-up is simply counted in the DTI calculation.
Background Knowledge for Finance
Source: https://www.rbnz.govt.nz/education/explainers/dti
Exam Tip for Finance
New dwelling = exempt; alterations or extensions to an existing dwelling = not exempt.
Common Mistakes to Avoid on Finance Questions
- •Reading 'construction loans are exempt' as covering any building work.
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