APRA Imposes Limit on Elevated Debt-to-Income Home Lending Levels
In a significant move to ensure financial stability, the Australian Prudential Regulation Authority (APRA) will apply a limit on elevated debt-to-income (DTI) home lending levels to all banks, effective from 1 February next year. This measure dictates that banks can lend up to 20% of their new mortgage lending at debt levels of six times income or more. The limit is being enforced separately to ADIs’ owner-occupier and investor lending, with high DTI loans for investors being a particular concern for APRA.
Exemptions and Implications
Notably, loans for the purchase or construction of new dwellings will be exempt from this limit, a move that could potentially encourage the flow of credit into housing supply. It’s worth noting that the enforcement of macroprudential measures by APRA is a rare occurrence, although such measures are commonplace in other countries.
Current DTI Lending Landscape
As per current data, around 10% of investor loans exceed six times income, and the ratio is 4% for owner-occupied loans. Despite the imposed limit, the DTI lending limit is not currently binding, which means it is unlikely to have a near-term impact on borrowers’ access to credit at an aggregate level. Only a small number of ADIs are expected to be near the limit for high DTI investor lending at this stage, possibly including one or more of the major banks and Macquarie Bank.
APRA’s Proactive Approach
According to APRA, this proactive measure is being taken to “pre-emptively contain a build-up of housing-related vulnerabilities in the financial system.” The limit is designed to prevent an unsustainable rise in household indebtedness during periods of heightened risk, without overly constraining credit supply at other times. APRA Chair, John Lonsdale, emphasized that the signs of risk build-up are primarily concentrated in high DTI lending, especially to investors. Therefore, activating a DTI limit now aims to pre-emptively contain these risks and strengthen banking and household sector resilience.
Non-Bank Lenders Stand to Benefit
This regulatory change could also benefit non-bank lenders, though it should be noted that APRA holds powers to patrol lending by non-banks as well, if necessary. Should levels of high DTI lending rise towards the 20 per cent limit over the coming period, this limit will act as a guardrail, expected to have a greater impact on investors, who typically borrow at higher DTI ratios than owner-occupiers.
Proportionate Approach Across All ADIs
To implement this policy fairly across all ADIs, APRA has outlined a specific approach. It will apply a 4-quarter rolling measurement to smaller banks and provide them with a longer implementation period, if required. Non-SFIs will be given the option not to apply exemptions in their reporting, thereby streamlining data and monitoring.
This strategic move by APRA reflects a proactive stance towards managing financial risk in the housing sector, and underscores its commitment to ensuring financial stability and resilience, particularly in the wake of economic strains caused by the global pandemic.
The full original report can be found Here.
