Sydney mortgage holders carrying huge debt loads

By Martin North, cross-posted from the Digital Finance Analytics blog:

We have updated our core market model with household survey data this week. One interesting dynamic is the LTI metrics across the portfolio. We calculate the dynamic LTI, based on current income and loan outstanding.  This is not the same a Debt Servicing Ratio (DSR), and is less impacted by changes in mortgage rates. It is also a better measure of risk than Loan To Value (LVR)

LTI has started to become an important measure of how stretched households are. For example the Bank of England issued a recommendation to the PRA and the Financial Conduct Authority (FCA) advising that they should ‘ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5’.

In response, UK banks trimmed their offers. For example,

NatWest is lowering its loan-to-income ratio for some borrowers, which means they won’t be able to borrow as much to buy a home.

House buyers who stump up a deposit between 15 and 25 per cent will only be able to borrow up to 4.45 times their annual income, down from the previous maximum of 4.75 per cent.

The new multiple will apply to both single and joint earners.

The move suggests a rising number of borrowers are having to stretch themselves to be able to afford to buy a home as prices continue to rise.

Turning to Australia, we start with a state by state comparison.  The AVERAGE loan in NSW is sitting at close to 7, ahead of Victoria at over 5, and the others lower. This highlights the stress within the system for property purchasers in Sydney, with affordability a major barrier.

Across our household segments however, the three most exposed segments are the most affluent. Wealthy Seniors sits about 9, followed by Young Affluent at 8 and Exclusive Professionals at 7.5. On the other hand, Young Growing Families are at around 5.5 (still above the Bank of England threshold).

Looking at type of buyer, First Time Buyers are sitting at 7.5%, with those trading up at 6%. Holders are sitting at 4.5%

Finally, here is an average by age bands, and plotted against relative volumes of mortgages. Pressure is highest in the 60+ age groups, this is because incomes tend to fall as households move towards part-time or retirement, but these days more will still have a mortgage to manage.

The dip in volumes in the 25-29 group is explained by many in this band choosing education, or starting a family, rather than home purchase, and the peak volume for purchase in after 30.

Overall LTI is a good indicator of affordability pressure, and the regulators could [should?] impose an LTI cap to slow lending growth, counter building affordability risks and rising housing debt.


  1. Not sure why DSR has ever been a more useful measure of risk compared to LTI. I think DSR comes with the implicit assumption that everything is OK as long as you cover interest payments (moneylender benevolence). Kind of a cop out for prudent financial management for households.

    • Pure bubble mentality. Requires everlasting capital gains and rising real wages to justify use of this measure.

  2. LTI is particularly important now that it seems that repaying borrowed money cannot be made any cheaper. Falling interest rates easing the burden of repayment (and which have also helped fuel rising prices) no longer seems likely.

    • No longer seems likely is also the growth of we’ll paid jobs. This is another important measure..

  3. Tassie TomMEMBER

    Brilliant article – when all else fails, LTI is king. This is the key metric and one that should receive way more focus.

    One question – I’m not sure if anyone can help me. Take the first graph, and NSW’s LTI of 7. Does this refer to the size of a loans as they were taken out? Or does it refer to all outstanding loans including those that have been partially paid off? (The answer will probably also apply to all other graphs in this article.)

  4. TailorTrashMEMBER

    Genuine question …..why would wealthy seniors have such high LTI ………are we seeing more seniors retiring (low income = low return on savings or super) with a big mortgage or gearing the house to help the kids ………….this has to be a new phenomenon .

    • drsmithyMEMBER

      I’d guess it’s a combination of:
      * “Equity mate” fallout
      * Investment properties [0]
      * Bank of [grand] mum and dad (ie: [grand]parents took out the mortage, but the kids are paying it off)

      [0] They’re probably using taxable, rather than gross, income. So people in up to their necks with investment properties that are all just breaking even servicing the (probably IO) loans will appear to have enormous mortgage liabilities on low incomes.

  5. reusachtigeMEMBER

    Nothing we can’t handle. To be honest, everyone I know from the seminars could make good with an endless supply of capital from the banks as there’s just so much property we could invest in! Actually, now that I think about it, we never get turned down when we rock up to our bank managers and ask for more. I might go get some dosh now!

  6. “The AVERAGE loan in NSW is sitting at close to 7, ahead of Victoria at over 5”

    Finally an article that explores this. The above blows my mind, its truly incredible. Remembering that the old ‘prudent’ lending advice was 3x single income and 2.5x joint. This was still more or less the norm in London when I bough there in 99, but seems to have now stretched out to 5x single, as part of UK’s own bubble.

    So lets say you have an income of 200k, the Av loan is 1.4mil. Your take home a month is around 10k and your INTEREST payment at 5% is nearly 6k. That’s before you pay down any principal. How TF do people take on and pay off these debts over 20+ years? What’s in their heads?

    This confirms my own purely anecdotal belief that debt in Aus is beyond anything pre-GFC in the US. Put simply, there was little need to take out 7x income mortgages in most places there because stackes of places were available much cheaper. So anyone who did this was just being ridiculously stupid and hence its an edge-case. Whereas in Aus this is NECESSARY if you are new-ish to the Ladder and want to live anywhere decent.

    I hope this article gets some MSM time because it reveals the full horror of the situation.

    • Tassie TomMEMBER

      Totally agreed. Any LTI above 5 cannot be paid off within a working lifetime.

      The only way to pay it off (without inheritance) is if your income significantly increases, ie, you get a better job. By this I do not mean wages inflation, as wages inflation is likely to be associated with actual inflation, which is likely to be associated with higher interest rates, and with a LTI of 5 higher interest rates are likely to send you broke before it inflates away your debt.

      Otherwise, you will never pay it off – it is just speculative, hoping that when you need to sell it (or when you die) it is worth more than it is now, covering your remaining debt plus more.

    • drsmithyMEMBER

      What’s in their heads?

      “Property doubles every ten years, so I’ll be able to sell and use the profits to pay off the mortgage.”


        …What’s in their heads?
        1) Depression and anxiety
        2) Resentment
        3) Denial
        4) Stress
        Despite the daily pep talks, nightly ‘this could be you’ success stories with property and endless images of gorgeous, smiling, trim and attractive people who have evidently emerged emotionally unscathed, thousands are paying a daily ‘price’ for these debt burdens.

        It’s logical to conclude that ‘if things go bad’ there will be trouble i.e. job loss, relationship fracture, illness, injury etc but these focus on the arriving financial ‘code red’. What is not discussed (unsurprisingly) is the very real damage to emotional health that these crushing debt loads have on everyday folk. Many just cannot believe that all the emotional trauma and despair that they are gripped with due to the staggering debt responsibilities will ever be worthwhile. Or, if they somehow manage to come out the pipe with a net gain, will they say it was worth the terror?

        Behind the ABS and their debt / disposable income charts which reveal not just debt peonage, but a suffering and mentally unwell citizenry who have been misled in ways that defy all sensibility. Down below, the citizenry expected (believed) there existed regulations to protect them from such predation as other aspects of daily life have similar safeguards-police, civil and criminal statutes and other required machinery developed over centuries.

        The trepidation of 100’s of 1000’s of debt holders in this arena cannot be dismissed or overcome; their very real and accurate apprehension of realizing that they have been trapped and are unable to escape. That the potential that things could get much worse from what seems an already bad place, will do little to assuage the rising emotional chaos. Many, by the strength and power of denial, cannot visualize anything but the optimistic. How extraordinary that ‘all this’ was promoted and how sad that it was so widely adopted.

  7. My wife and I built our first home in 2008 in Sydney with a LTI ratio of 4.

    Now the house is worth comfortably more than 7 figures, we have paid off a decent chunk (as well as buy new cars, furnish and fully landscape the house), and both received good wage growth since then.

    We now comfortably sit with an LTI of 1.5 or so.
    Since having children, the minimum mortgage repayment is now number 3 in our monthly expenses list (childcare is 1).

    I’ve really got no idea how people can go to 7. I have no idea how banks can be so reckless either.

    I’m looking forward to the crash and picking up some scraps. Even then, we wont go much beyond a LTI of 3.