APRA sets 20% cap on high debt-to-income home loans to curb riskier lending
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The news: The Australian Prudential Regulation Authority (APRA) said it will limit high debt-to-income (DTI) home lending to pre-emptively contain a build-up of housing-related vulnerabilities in the financial system.
The numbers: APRA said this morning that while overall bank lending standards remain sound, it has seen a pick-up in some riskier forms of lending over recent months as interest rates have fallen, housing credit growth has lifted up to above its longer-term average, and housing prices have continued to rise.
The regulator said that combined with a resilient labour market, these trends suggest a shift in the financial risk cycle and a potential build-up of vulnerabilities that could undermine banking sector and household financial resilience if left unchecked.
In particular, APRA has seen a rise in high DTI lending, driven by high DTI loans to investors. This is expected to increase further in this part of the cycle, the regulator said, and already high household indebtedness could increase further.
APRA said it wants to contain the potential build-up of housing-related risks from high DTI lending by activating a DTI lending limit, with support from the Council of Financial Regulators.
From 1 February next year, the limit on home loans will allow authorised deposit-taking institutions (ADIs) to lend up to 20% of their new mortgage lending at debt of six times income or more. The limit will apply separately to ADIs’ owner-occupier and investor lending.
At an aggregate level the limit is not currently binding, so it is not expected to have a near-term impact on borrowers’ access to credit. Only a small number of ADIs are expected to be near the limit for high DTI investor lending at this stage.
Should levels of high DTI lending rise towards the 20% limit over the coming period, this limit will act as a guardrail and is expected to have greater impact on investors, who typically borrow at higher DTI ratios than owner-occupiers.
What they said: “One of the key structural risks to system stability that APRA has long been concerned about is high household indebtedness,” said APRA chair John Lonsdale.
“Rising indebtedness has in the past often been associated with an increase in riskier lending and rapid growth in property prices.
“At this point, the signs of a build-up in risks are chiefly concentrated in high DTI lending, especially to investors. By activating a DTI limit now, APRA aims to pre-emptively contain risks building up from this type of lending and strengthen banking and household sector resilience.”
The source: APRA media release
