Risky lending falls as tough APRA rules kick in

The value of mortgages with risky debt ratios has fallen, with tough new rules from the Australian Prudential Regulation Authority (APRA) taking hold.

APRA’s June Quarterly ADI Property Exposure report shows loans with a debt-to-income ratio above six, which APRA considers to be “high risk”, fell one per cent last quarter.

The fall takes the proportion of new mortgages with a debt-to-income ratio of six times or more to 22.1 per cent, down from 23.1 per cent in the March quarter and off a record high level in the December 2021 quarter of 24.3 per cent.

In October 2021, in response to rising debt-to-income levels, APRA increased the rate at which banks stress test mortgages from 2.5 per cent to 3 per cent.

This means anyone applying for a mortgage today needs to show the bank they can afford the repayments even if interest rates were to rise 3 per cent (above their current rate). Research Director Sally Tindall said APRA’s measures had reduced high debt-to-income loans.

“This data shows APRA’s stricter serviceability test is doing its job, with the value of risky lending falling for the second quarter in a row,” Ms Tindall said.

“We expect high debt-to-income lending will continue to drop as rising rates put the brakes on how much people can borrow from the bank.”

Ms Tindall said it’s possible APRA will reduce its serviceability buffer in the future as the cash rate continues to rise.

“APRA’s stricter lending rules were introduced at a time when interest rates were at record low levels and people were taking on concerning levels of debt compared to their incomes,” she said.

“As the cash rate returns to more normal levels, we could see APRA lower the 3 per cent stress test back down to 2.5 per cent.”

According to APRA, new investor lending, as a share of all new term loans was 30.9 per cent, which was similar to the previous quarter but up 3.1 per cent year-on-year.

New interest-only loans, as a share of all new term loans was 20 per cent, up 0.8 per cent from the previous quarter and up 1.6 per cent year-on-year.

While, loans with a loan-to-value ratio of 90 per cent or more was 6.4 per cent, down 0.9 per cent from the previous quarter and down 2.2 per cent, year-on-year, as a proportion of all new term loans.

The total amount in residential offset accounts dropped slightly to $225.71 billion in the June quarter, down $2.34 billion (1 per cent) from a record high in the previous quarter.

This is despite only a small portion of the June quarter being impacted by the RBA rises.

This is because RBA cash rate hikes take more than a month, but in some cases up to three months, to hit people’s bank accounts.

Compared to a year ago, the total balance in offset accounts increased $29.20 billion or 14.9 per cent.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.