NAB tightens loan-to-income limits

By Leith van Onselen

With Australian household debt at 200% of disposable income:

And Australian housing prices starting to fall, NAB has cut its maximum loan-to-income ratio to 7-times. From Australian Broker (h/t Martin North):

From Friday, 16 February, the loan to income ratio used in its home lending credit assessment has been changed from 8 to 7.

“Regulatory bodies have raised concerns about Australia’s household debt-to-income ratio, which has risen significantly over the past decade,” said NAB in a note to brokers.

It said it is committed to ensuring its customers can meet their home loan repayments now and into the future.

With the new change, loan applications with an LTI ratio of 7 or less will proceed as normal and will be subject to standard lending criteria, according to the note.

For an application with an LTI ratio of more than 7, the bank will automatically decline or refer it depending on the income structure, i.e. pay as you go or self-employed.

NAB said its serviceability calculator will be updated to reflect these changes.

The bank introduced an LTI ratio calculation for all home loan applications last year. It was also last year when it started declining interest-only loans for customers with high LTI ratios.

Sensible move by NAB. If other lenders follow, it will create another headwind for the housing market.

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  1. Is this based on gross or net (post-tax) household income?
    If gross, a household with $200k gross income can borrow $1.4m?

  2. Jeez. Seven times still seems pretty extreme (is it pre-tax income, post-tax income, etc?).

    If it is the former, the average Aus household income at around $90K (with a disposable income that I presume is much, much lower) still allows you to borrow a cool $630,000. Seems pretty high.

    I know, I know – this is loser thinking! Property only ever goes up. Get some debt into ya.

    • Absolutely, Arrow, how can one ever lose in property? Just ask a realtor or a spruiker. The biggest ever household financial purchase is not regulated. No wonder the industry has been totally infiltrated by shysters and spivs, ah?

    • Property only ever goes up. Except in Sydney, where Corelogic shows that the market will almost certainly go negative YoY tomorrow. Heh heh heh. I picked next Saturday for the big day, but it looks like I was a little too conservative.

      I wonder what sort of exposure this news will get in the MSM? I wouldn’t be surprised if it isn’t reported at all.

      Interestingly, it took the Sydney market over 200 days to reach it’s peak from this time last year, and only about 160 days to drop back. So the market is falling faster than it rose. Gramus has been predicting a turnaround caused by an influx of overseas “students”, but I’m not so sure that’s gonna happen.

      And for further warm and fuzzies, Melbourne went negative QoQ over the weekend as it follows Sydney down the gurgler.

      The heavily geared specufestors like Nathan Birch who relied on ever increasing house prices must be sweating buckets as they watch their unrealised capital gains disappearing at the rate of a couple of thousand dollars per week on every million dollar home. Lol.

      • hope your right but weekly price drops slowed down over the last 2 weeks and if clearance rates continue to improve prices may turn again.
        If Nathan really has 200 properties then yeah nice numbers in the weekly loses there.

      • @Nicola

        I maintain a spreadsheet showing smoothed Corelogic daily price falls in Sydney to help me understand the long term trend in that market. Over the last 14 days, the numbers look like this…

        -0.043 Oldest
        -0.054 Today

        So, with some of the noise removed from the signal, rather than the falls slowing down, it looks to me that the rate of decline is actually increasing. This is fairly short term, so take it with all necessary salt, but it’s interesting nonetheless.

        Its possible that we’re actually on the tipping point where we go from the “melting” rate of about 10%pa falls to month or so is going to be even more interesting.

      • Ditto, many thanks for your comments. However Nikola could be correct with Sydney’s January weekly price drops slowing and improvement in clearance rates. Apparently the first 10 days of January for the Big-4 was the most favourable in capital raising since the GFC. Would be a different story without the Government guarantee since US interbank loans have all frozen since 3rd January, according to the FRED website. A very serious situation is developing whereby US banks are afraid to lend to each other, yet our banks are accessing capital pouring it into Auz unproductive assets like there’s no tomorrow. I’m at a loss…

      • Yep, Sydney down 3 % after up 100 % in 5 years.
        Surely an Elliot wave retracement would give us -26.8 or -40 % drop…
        Still the previous real estate treasurer Hockey has his mansion for sale now direct to china now. He knows where the cash buyers are.
        After he stopped a whole 2 foreign buyers (as a token effort).

      • wait til the Chinese start selling up in droves (now they’ve washed their ill-gotten gains through our property) and take their cash somehwere it’ll earn them a (better) return compared to our sinking prices

      • @LSWCHP – last week price drop for Syd was -0.15% and the week before -0.22% same source. Read MB’s Friday reports. Last Saturday clearance rates improved bit more over the previous week.

      • Are people sure the Corelogic “daily” data for Sydney isn’t 10 weeks out (6 or 7 weeks lag + 3 weeks smoothing)? I have a feeling prices are actually on the rise again right now and Corelogic is looking at last December

      • @ Simon.

        Yes there is a big lag, Corelogic is telling us about conditions at the start of Jan.
        If we get to April and prices are still falling then it is all over red-rover but we are not there yet.

        I don’t think international student/offshore buying will be enough to change the story overall, but I do think it will support the market over coming months more than most here are anticipating.

        P.S. I hope I’m wrong.

    • Whilst its completely unreasonable, it’s another sign of tightening, rather than loosening. Isn’t property in Sydney 11 times household income? I’m sure people on less than $150k household income have borrowed more they can chew.

      • It’s ironic but banks do typically tighten conditions once the market starts to weaken — thus exacerbating an already tricky situation.

  3. Lol. 7-times. 7-fkn-times!

    Before tax, I assume. So after tax it’d be at least 10x.

    March on, prudent lenders!

    • Yes guys it is 7 times Gross income so if you are earning 200k then you can borrow $1.4mil – I actually dont even know why they bother with it to be honest

      • Its was 4x max in the UK after 2008 credit crunch in the UK.
        Average person on £30k at the time could only get £120k.
        At the time before the crash a 1 bedroom would go for £250k in zone 2.
        You can imagine how much that cooled the market.

  4. pyjamasbeforechristMEMBER

    The smart bank would get in front of this momentum and heavily discounted low LVR and LI ratio OO loans and hike high LVR and LI ratio IP loans. Getting the safe customers now and strong buffer could mean your the biggest back after the shake out.

    But that’s a little longer view than ones nose so nevermind

    • They are all safe customers. Genworth will cover it on 200 times leverage. (well the Australian taxpayer will bail them out).

  5. Looking at the corelogic index today, unless we have an uptick tomorrow we are 1 day, maybe 2 away from year on year growth turning negative. Year on year today is +0.05%. So far the steady grind down is still on despite Chinese new year and uni starting back up. Let’s hope it continues for the next month, then we can be a bit more confident it is on for real this time!

    I wonder if this will make the news and start some panic selling?

    • No. The average punter, aided by the media, will be all

      “This just makes it a great time to buy, get in fast because it will bounce back fast. In the long term property always goes up.”

      Smart money will continue to slip out. But the masses will not believe big falls are possible until AFTER THEY HAVE SEEN big falls.

    • Domain has been working hard to churn out article after article boasting about property all weekend! Loads of spruiking going on, probably because they know the truth about values heading south.

  6. 7 times, WTF! These guys are absolutely crazy.
    If I went to 7 times income I could buy in Vaucluse, but I’m not a moron!

    • Ooook.. Michael, we understand your take household income is close $2 Million… as stand alone houses in Vaucluse aer 15M+ min.

      So, do you have jobs going at your workplace? Happy with $400k before tax and I don’t expect bonuses or anything. Low maintenance. 🙂

  7. I believe that the ~200% figure has been revised down somewhat due to an error in the prior calculation. It’s still in the mid-180’s, but the the difference is material


    It’s high multiple lending that ‘does in’ the Banks and their customers … as they learned with the Irish housing bubble collapse in 2007.

    When the housing bubble burst there … putting all its Banks to the wall and requiring bailouts exceeding 70 billion euro or about $NZ 109 billion (note interview with Prof Bill Black and others link below).

    Irish housing across its metros on average went from 4.7 times annual household income in 2007 to 2.8 a few years later … refer the schedule of Demographia Surveys at .

    Australia is currently 5.9 times … New Zealand 5.8.

    What was the capital base of the Irish Banks in 2006 and 2007 ?

    If a 4.7 unweighted median multiple across its metros blew the Irish banks out of the water, how come the Australian and New Zealand ones are supposed to survive 5.9 and 5.8 respectively ?

    Following the bust, the Central Bank of Ireland found in subsequent research, it was high income multiple lending (more so than high loan to value lending) that did the most damage to the Irish Banks … and it imposed a general lending cap of 3.5 times gross annual household incomes.

    A year earlier the Bank of England had capped at 4.5 times.

    In normal housing markets house prices should not exceed 3.0 times annual household income, requiring sensible mortgage loads of about 2.5 times (Demographia Survey ).

    Prof Bill Black & others discuss the Irish financial system performance may be of interest … Youtube

    • The CBA says the days of soaring house price growth in Australia are over | Business Insider

      House price growth in Australia has been slowing in recent months, led by Sydney and Melbourne, Australia’s largest and most expensive property markets.

      That trend looks set to continue, says the Commonwealth Bank, driven by tighter lending standards from Australia’s banking regulator, APRA, along with weak wage growth, affordability constraints, an increase in apartment supply and, eventually, higher mortgage rates.

      “We believe the headwinds for housing prices will strengthen through 2018,” says Michael Workman, senior economist at the CBA, adding that “cycles will vary across the capitals”. … read more via hyperlink above …

      • … New Zealand update …

        ANZ economists see house prices being capped by affordability constraints and new Government measures |

        ANZ economists don’t believe the recent uptick in house prices will result in a full-blown resurgence, and think that prices will be capped to a degree by affordability constraints and various measures proposed by the new Government. … read more via hyperlink above …

        Housing – New Zealand Labour Party

        … extract …

        Remove barriers that are stopping Auckland growing up and out

        Labour will remove the Auckland urban growth boundary and free up density controls. This will give Auckland more options to grow, as well as stopping landbankers profiteering and holding up development. New developments, both in Auckland and the rest of New Zealand, will be funded through innovative infrastructure bonds.

        Demographia International Housing Affordability Survey | Scoop News

      • … Things are on a roll in New Zealand … with the can do government replacing the can kicking one ! …

        Housing Minister Phil Twyford says he’s planning a workshopping event for representatives of the finance community and players in the development and construction sector to help crack NZ’s problems around infrastructure financing |

        The Government is planning to bring together players from the finance community with people representing development and construction interests to hammer out a plan to solve New Zealand’s infrastructure financing problems.

        Minister of Housing Phil Twyford says the event will be going ahead “within the next couple of months”, but details are limited at this stage.

        Last week, Twyford said lack of access to capital is “crippling the supply of houses,” adding that one of the Government’s biggest priorities is cracking down on the problems around infrastructure financing.

        “There is a planet of cash out there that would love to invest in our cities’ growth, but they have no way of doing it at the moment.” … read more via hyperlink above …

      • NEW ZEALAND Labour soars to highest level in 15 years in new 1 NEWS Colmar Brunton poll | 1 NEWS NOW | TVNZ

        Support for Labour has jumped strongly in the latest 1 NEWS Colmar Brunton political poll.

        The party is at 48 per cent, up nine points on its December poll result, its highest level in 15 years.

        And it now has a clear lead over National which has slipped three points since December to be at 43 per cent. … VIEW & READ more via hyperlink above …

  9. the delusion runs bone deep. Bank share prices are up 1% today when they ought to be unravelling faster than Barnaby’s job prospects on this sort of data

    • It’s madness isn’t it? People only do it because they expect huge capital growth. If said capital growth fails to materialise, then the reality of their astronomical LTIRs will hit like a freight train full of lead ingots.

    • Yep, lads were posting about it last week when the conniving buggers snuck it through with near complete silence in MSM.

      Laying the groundwork for the crash.

      • Brenton, is this saying depositors; shareholders etc will have to take a haircut in the case of a bail out?

      • Not explicitly, but it provides the necessary framework for exactly what you describe to occur at any given moment during a crisis.

        Translation, if I still had large deposits tied up with the banks, I would not feel comfortable leaving them there if these price declines continue for another month or 2.

    • Yep, the silence is deafening. This all started (in the prime-time anyway) with Jeroen Dijsselbloem’s “template” slip-up in 2013 with regard to the financial crisis in Cyprus. Here’s a reminder:

      “Bail-ins” are going to be the standard operating procedure for all future financial crises. Most of the legal work has already been sorted out around the world and the little sheeple don’t have a clue about it, distracted by bread and circuses whilst their life savings are hooked up to detonate.

      Something that people really need to understand is that they are not “depositors” with a bank. They do not make deposits and the bank does not protect their deposits for them as if it’s some pile of gold in the corner of a vault.

      They are unsecured creditors supporting the bank’s security purchasing program. Hardly anyone understands this!

      Nice summary here:

  10. That is just utter madness. 7-8 times income? Uk have a cap of 4.5 x income. This shows us why we have a bubble, so much for the mainstream argument that there is no bubble theres just a shortage of properties.

    We have a bubble because of loose lending standards, banks are spraying credit around left right and centre.

  11. Gavin HegneyMEMBER

    the Australian system would support a market that rusts not busts. So it may be a lost decade of growth as has happened to much of WA.. The interesting point is that if we have had income percentages go from 50% to 200% and over that period prices have increased substantially , how do we have as much money into the market over the next 30 years to replicate the same growth rates ? This is where decisions today may need to be different to decisions past .

  12. Be interesting to see how the new credit reporting system works into this, if at all. My credit score has just dropped 300 points from very good to below average overnight and the only new piece of info on my file is a 100% repayment history. Credit card churning seems to be some sort of factor, (15 applications in 5 years) but the same amount of applications was on my file last week when I was rated very good. Over on the frequent flyer forums there’s been a lot of people hit all with high incomes and 100% repayment record.

  13. Also banks see a couple income as risk positive, NOT negative.
    As a result they just simply add up both partners incomes and then times it by 7.
    This is regardless if one person might lose a job, take a pay cut or even take maternity leave.

  14. Jumping jack flash

    LTI? Utter tosh, I say!

    The only thing that matters is LVR.
    As said above, the easy way around this “limit” is to simply go to a mortgage broker.
    They’ll save you.

    Its not like mortgage brokers are under any kind of investigation, or Royal Commission, or anything like that.