15 Jun 2022

Banks crack down on high debt-to-income home loans as regulator APRA comes knocking

Two of Australia's biggest banks have moved to curb high-risk home lending, as the regulator revealed it has been warning some institutions to cut back on risky loans.

This week, ANZ told mortgage brokers and its bankers that from June 6 it would no longer make loans to borrowers who would owe more than 7.5 times their annual income.

That is down from a previous cap of nine times income.

Earlier this month, NAB lowered its debt-to-income (DTI) limit from nine to eight times income.

These moves have the effect of reducing the maximum amount a home buyer or someone refinancing can borrow from what was previously possible.

"ANZ regularly reviews lending appetite and policies as the economic environment changes to ensure we are continuing to lend prudently to our customers," a spokesperson for the bank told ABC News.

Speaking at the AFR's Banking Summit, ANZ's head of retail banking, Maile Carnegie, this morning said the change had in part been in response to concerns from the banking regulator APRA about the rising level of loans with a DTI ratio of more than six, which it considers risky.

Almost a quarter of new loans had a DTI of six or above in the second half of last year, although Ms Carnegie said very few loans came close to ANZ's previous cap of nine times income.

APRA warns some banks to lift standards

Speaking at the same banking conference just hours later, APRA chairman Wayne Byres confirmed the regulator had contacted some banks with concerns about the level of high DTI loans they were issuing.

"We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year," he told the AFR summit.

"Interestingly, this growth has not been an industry-wide development, but rather has been concentrated in just a few banks.

"We therefore opted to tackle our concerns on a bank-by-bank basis, rather than opt for any form of macroprudential response.

"We expect lending policy changes at those banks, coupled with rising interest rates, will see the level of high DTI borrowing begin to moderate in the period ahead."

In a written statement, NAB executive Kirsten Piper said the bank is "committed to lending responsibly" to "ensure customers are able to appropriately manage their repayments, both today and in the future."

"NAB will continue to put responsible lending first in its approach to credit and we welcome ongoing consultation with regulators." 

Westpac and CBA both told ABC News they had not made recent changes to their policies around high debt-to-income ratio loans.

Westpac said all loans with a DTI of seven or more are sent for "manual assessment" by its credit team.

CBA said loans with a DTI or six or greater and a high loan to value ratio are subject to "tighter lending parameters".

ABC News has asked both banks for further details around those processes.

'Pockets of stress likely'

APRA started increasing its vigilance around home lending in October last year, when it announced an increase in the minimum mortgage serviceability buffer.

That meant that, from November, new borrowers had to be tested to see if they could cope with interest rates at least 3 per cent above their current rate, up from 2.5 per cent previously.

Mr Byres said the regulator was not worried about the potential for widespread home loan defaults across the banking sector, but it was concerned that some borrowers, especially recent ones, may be under severe financial stress.

"We are now entering a very different environment than has existed for much of the past decade," he said.

"The faster-than-expected emergence of higher inflation and interest rates will have a significant impact on many mortgage borrowers, with pockets of stress likely, particularly if interest rates rise quickly and, as expected, housing prices fall.

"Of particular note will be residential mortgage borrowers who took advantage of very low fixed rates over the past couple of years, and may face a sizeable 'repayment 'shock' (possibly compounded by negative equity) when they need to refinance in the next year or two."

Negative equity is a situation where borrowers owe more to the lender than their property is worth.

Recent borrowers with small deposits are particularly at risk if home prices fall. 

SOURCE: https://www.abc.net.au/news/2022-05-31/about-to-get-harder-to-get-a-big-home-loan/101112904

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