Four Banks Nearing the Debt-Income Threshold: A Discussion on APRA’s New Mortgage Lending Cap
According to recent reports, four banks are nearing the newly announced cap of 20 per cent of their new mortgage lending at debt levels of six times income or more. This revelation was made during an appearance by Therese McCarthy Hockey, a member of the Australian Prudential Regulation Authority (APRA), before the Senate Economics Legislation Committee. The banks in question are likely to be three of the four major banks and Macquarie Bank, or alternately, all four of the major banks.
Understanding the APRA Limit on Home Lending
This development follows APRA’s recent announcement of a limit on elevated debt-to-income (DTI) home lending levels. Set to take effect from 1 February next year, this DTI limit will permit banks to lend up to 20 per cent of their new mortgage lending at debt levels of six times income or more. This limit applies separately to Authorized Deposit-taking Institutions’ (ADIs’) owner-occupier and investor lending.
High DTI Loans: A Concern for APRA
APRA has voiced particular concerns about high DTI loans for investors. Loans for the purchase or construction of new dwellings will be exempt from this limit. At the moment, across the industry, around 10 per cent of lending is at or above six times for investor lending, and around four per cent for owner-occupier loans.
The Implication of Four Banks Nearing the Cap
With four banks teetering on the brink of the cap – presumably for investor loans – there may soon be a rationing of high DTI credit flows for new investor loans. This could mean lenders approving only a lower level of borrowing for some investors. Alternatively, customers may be directed to other banks that are not subject to this restriction.
This limitation is intended to ensure the financial stability of banks, minimizing the risk of defaults and losses. It is also expected to encourage responsible lending practices, thereby protecting borrowers from falling into high-risk debt traps. While this cap may cause an initial disruption in the lending landscape, it is anticipated to lead to a more resilient and sustainable banking sector in the long run.
As these banks approach the APRA threshold, it will be interesting to observe the strategies they adopt to manage their mortgage lending portfolios. Equally, potential borrowers, particularly investors, will need to be aware of these changes and their implications when considering their borrowing options.
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