Australian banks tighten ties around leveraged mortgage borrowers

The latest mortgage risk data from the Australian Prudential Regulatory Authority (APRA) showed that an unprecedented 24% of new mortgages issued in the December 2021 quarter had a debt-to-income ratio (DTI) of six or more:

High DTI loans surged in 2021.

Indeed, the percentage of loans made at high DTI ratios has snowballed over the previous five quarters, which partly explains the extreme growth in house prices in Australia during the pandemic.

With interest rates now rising and real estate values ​​facing the prospect of major falls, Australian banks have begun to cut sky-high DTI loans:

ANZ Bank said this week it would no longer accept loan applications from borrowers whose total debt is more than 7.5 times their income. Previously, the bank was willing to consider applications from customers whose debt-to-income ratio (DTI) was up to nine times.

It follows a similar move by National Australia Bank, which this month cut its debt-to-income ratio limit from nine to eight times.

Although both banks’ upper limits are still high, the moves are a sign that lenders are looking to reduce their exposure to higher-risk loans as interest rates rise, ending a period of ultra-good debt. booming real estate market and prices…

The Australian Prudential Regulation Authority considers DTI ratios of six times and above to be “high” and in October last year it asked banks to “review their risk appetite” for this type of lending.

Since cheap and easy credit has fueled the pandemic house price boom, tighter access to credit and rising rates will have the opposite effect and depress Australian home values.

The impact will be hardest on those who took out giant mortgages at record rates last year. Many of these borrowers now face the prospect of a sharp rise in mortgage repayments as their property plummets in value.

Unconventional economist
Latest articles from Unconventional Economist (see everything)

Comments are closed.