Banks crack down on high-debt-to-income home loans as regulator APRA knocks on door

Two of Australia’s biggest banks have moved to cut subprime home loans as the regulator revealed it had warned some institutions to cut subprime lending.

This week, ANZ told mortgage brokers and its bankers that from June 6 it would no longer make loans to borrowers who owe more than seven and a half times their annual income.

That’s down from the previous cap of nine times income.

Earlier this month, NAB lowered its debt-to-income limit (DTI) from nine to eight times income.

These moves have the effect of reducing the maximum amount a homebuyer or someone refinancing can borrow on what was previously possible.

“ANZ regularly reviews lending appetite and policies as the economic environment changes to ensure we continue to lend prudently to our customers,” a bank spokesperson told ABC News.

Speaking at the AFR banking summit, ANZ head of retail banking Maile Carnegie said this morning the change had been partly in response to banking regulator APRA’s concerns over the increased level of loans with a DTI ratio above six, which he deems risky.

Almost a quarter of new loans had a DTI of six or more in the second half of last year, although Ms Carnegie said very few loans came close to ANZ’s previous cap of nine times income.

APRA warns some banks to lift standards

Speaking at the same banking conference hours later, APRA Chairman Wayne Byres confirmed that the regulator had contacted some banks with concerns about the high level of DTI loans they were issuing.

“We will also be closely monitoring the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown significantly over the past year,” he told the AFR summit.

“We have therefore chosen to address our concerns on a bank-by-bank basis, rather than opting for any form of macroprudential response.

“We expect changes in lending policy at these banks, coupled with rising interest rates, will see the elevated level of DTI borrowing begin to moderate over the coming period.”

In a written statement, NAB executive Kirsten Piper said the bank is “committed to lending responsibly” to “ensure customers are able to properly manage their repayments, today and in the future.” the future”.

Both Westpac and CBA told ABC News that they had not made any recent changes to their policies regarding high debt-to-income ratio loans.

Westpac said all loans with a DTI of seven or higher are sent for “manual review” by its credit team.

The ABC understands that this process involves more experienced bankers reviewing the applicant’s employment history, income and quality of security (i.e. valuation of assets, particularly mortgaged property) before to approve or deny the loan.

The ABC said loans with a DTI of six or more and a high loan-to-value ratio are subject to “stricter loan parameters”.

“Possible pockets of stress”

APRA began increasing its vigilance over home loans in October last year, when it announced an increase in the minimum mortgage service buffer.

This meant that from November new borrowers had to be tested to see if they could cope with interest rates at least 3% above their current rate, down from 2.5% previously.

RateCity research director Sally Tindall said the change, combined with rising interest rates, will have a much bigger effect on how much people can borrow.

RateCity’s director of research, Sally Tindall, says every rate hike reduces the maximum borrowing capacity of home loan seekers.(ABC News: Daniel Irvine )

“Debt ratios are only a small part of the servicing capacity equation. Rising interest rates, in particular, are much more likely to impact home loan applications for people in the future,” she told ABC News.

“This will likely help reverse the upward trend in debt-to-income ratios without the need for further regulation of the overall market.”

Mr Byres said the regulator was not concerned about the potential for widespread defaults on home loans in the banking sector, but was concerned that some borrowers, especially newer ones, could be subject to serious financial difficulties.

“We are now entering a very different environment than that which has existed for much of the past decade,” he said.

“The faster-than-expected emergence of higher inflation and higher interest rates will have a significant impact on many mortgage borrowers, with pockets of stress likely, particularly if interest rates rise rapidly and, as expected, house prices fall.

Negative equity is a situation where borrowers owe the lender more than their property is worth.

Recent borrowers with small deposits are particularly at risk if house prices fall.

Ms Tindall said these risks should make potential buyers think carefully about how much they are willing to borrow.

“While banks will still approve loans with a debt-to-income ratio of six or more, provided they pass the banks’ other utility tests, borrowers should be aware that this type of loan is considered risky by the regulator,” she said.

“If you’re considering taking out a new loan, don’t rely on your bank to tell you how much you can borrow. Work out what your monthly repayments would look like if rates increased by up to three percentage points, but also think about how much the debt you incur Real estate prices can go up and down, but that won’t make your debt disappear by magic.

“You might decide that being tied down with excessive debt for the next 30 years isn’t worth it.”

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