APRA Introduces First-Ever Debt-To-Income Limits for Mortgages

The Australian Prudential Regulation Authority (APRA) has implemented its first-ever debt-to-income (DTI) limit on home loans in a pre-emptive move to curb risky lending in the housing market.

Under the new regulations, banks will be restricted from issuing more than 20 percent of new mortgages to borrowers with a debt-to-income ratio exceeding six times. This limit will apply separately to owner-occupier and investor lending.

APRA Chairman John Lonsdale said the cap was supported by other regulators, including the Reserve Bank of Australia.

“We will consider additional limits, including investor-specific limits, if we see macro-financial risks significantly rising or a deterioration in lending standards,” Mr Lonsdale said.

The regulator noted that currently, 10 percent of loans to investors exceed the new cap, a figure that has been growing. In contrast, only 4 percent of lending to owner-occupiers is above the six times DTI threshold, including borrowers on the government’s 5 percent deposit scheme.

This means the new limits are not immediately binding on banks, with APRA stating that only a few institutions are approaching the limit for high debt-to-income investor lending.

The DTI limit includes exemptions for bridging loans for owner-occupiers and loans for the purchase or construction of new dwellings, providing some flexibility in the market.

In practical terms, a borrower seeking $1 million with an annual income of $166,666 would have a debt-to-income ratio of six times, placing them at the upper limit of what would be widely available under the new regulations.

The value of new loans made at more than six times DTI was $9.3 billion for the June quarter, representing 7 percent of total new lending, according to official banking statistics.

APRA’s intervention comes in response to a recent uptick in riskier lending as interest rates have fallen, credit growth has accelerated, and housing prices have risen. The regulator has historically expressed concern about DTI levels exceeding six times.

According to prudential statistics released in September, the value of mortgages to borrowers with a ratio between four and six has reached at least a six-year high, at more than $67 billion for the quarter to June, representing just under half of all loans.

The Reserve Bank of Australia noted in its latest Financial Stability Review that while investor lending has historically had lower default rates than other types of mortgage lending, it tends to drive housing price dynamics more significantly than owner-occupier activity.

“Investor loans may prove to be at greater risk of default in a severe downturn,” the RBA stated, explaining that property investors were more likely to sell if they expected prices to fall, as the property was not their principal place of residence.

This marks the first implementation of “macroprudential” policies on Australian banks since 2018. Between 2014 and 2018, APRA restricted banks’ mortgage lending with similar interventionist policies to rein in risky lending to property investors.

The first of these previous restrictions, announced in late 2014, required banks to limit lending to housing investors to no more than 10 per cent growth over a year. The second, announced in early 2017, imposed limits on interest-only mortgages to 30 per cent of total new housing lending, a cap that was removed in December 2018.

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