The latest mortgage risk data from the Australian Prudential Regulatory Authority (APRA) showed that an unprecedented 24% of new mortgages originated in the December quarter of 2021 were at a debt-to-income (DTI) ratio of six or above:
High DTI lending surged in 2021.
Indeed, the percentage of loans undertaken at high DTI ratios snowballed over the prior five quarters, which partly explains the extreme growth in Australian house prices over the pandemic.
With interest rates now on the rise, and home values facing the prospect of material falls, Australia’s banks have begun paring back very high DTI lending:
ANZ Bank this week said it would no longer accept loan applications from borrowers with total debts more than 7.5 times their income. Previously, the bank was prepared to consider applications from customers with debt-to-income (DTI) ratios of up to nine times.
It follows a similar move from National Australia Bank, which this month cut its debt-to-income ratio limit from nine times to eight times.
While both banks’ upper limits are still high, the moves are a sign of lenders seeking to cut their exposure to higher-risk lending as interest rates rise, ending a period of ultra-cheap debt and booming house prices…
The Australian Prudential Regulation Authority regards DTI ratios of six times and over as “high” and in October last year it asked banks to “review their risk appetites” for this type of lending.
Given cheap and easy credit fueled the pandemic house price boom, tighter access to credit and rising rates will have the opposite effect and push Australian home values lower.
The impact will be harshest on those that took out jumbo mortgages at record low rates last year. Many of these borrowers now face the prospect of a sharp rise in mortgage repayments at the same time as their property plunges in value.
