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How APRA caps could impact how much Australians can borrow

How APRA caps could impact how much Australians can borrow

Consumer advocate RateCity.com.au welcomes news APRA is considering changes to address the increasing risk in Australia’s home lending market.

The Council of Financial Regulators today announced APRA will consider possible macroprudential policy responses to address the medium-term risk created as a result of surging loan sizes.

While the regulator’s focus is on lending standards, changes under consideration are likely to help cool property prices. Any new policy response must also ensure first home buyers are not unfairly impacted.

The discussion comes on the back of figures out this month showing 21.9 per cent of all new loans funded in the June quarter had a debt-to-income of ratio of six or more, which is considered risky by APRA.

This is up from 16 per cent of all new loans funded in the June 2020 quarter.

New loans with a debt-to-income ratio of 6 or more

June quarter 2020June quarter 2021
16.0% of all new loans21.9% of all new loans

Source: APRA quarterly authorised deposit-taking institution statistics, all ADI’s, released Sept 2021.

What APRA lending caps could potentially include:

Potential changesDetailsProsCons
Debt-to-income ratio capsLimit the number of new loans with a debt-to-income ratio of 6 or more.Help prevent people from taking on risky levels of debt.

Could curtail investors buying multiple properties.

Could create a barrier for first home buyers unless exemptions are made.
Tightening of serviceability requirementsMandate serviceability floor rates or increase buffers. Currently banks stress test loans at rates 2.5% higher or their floor, whichever is higher. Big 4 bank average floor is 5.09%.Will help protect people from mortgage stress when rates rise.Could unfairly impact first home buyers.
Investor lending capsLimit lenders to a set proportion of new loans to investors. From Dec 2014 – April 2018 APRA limited banks to 10% growth in investor loan books.Reduces the number of investors competing with first home buyers and other owner-occupiers.Investor loans are still proportionally at acceptable levels. Previous cap had limited success cooling property prices.
Low loan-to-value ratios capsLimit the number of new loans with small deposits. Caps could vary according to borrower type (investors likely to be required to have larger deposits).Reduces risk in lending portfolios, particularly in the case of falling property prices.Could unfairly target first home buyers unless exemptions are made. Proportion of low deposit loans fell in the most recent APRA data.
Interest-only capsCap the number of new loans that are interest-only. Between March 2017 and December 2018 banks were required to limit interest-only loans to 30% of new lending.Encourages borrowers to pay down their debt, protecting them when rates do rise. Could deter investors.Interest-only lending is currently well below previous cap and therefore not required.
Combination of the aboveAPRA could implement a cap which looks at a combination of levers to reduce risk without penalising first home buyers.

RateCity.com.au research director, Sally Tindall, said intervention from APRA would be welcomed, however, any new macroprudential policy measures must be carefully considered.

“Record low rates mean people can borrow more without blowing the budget, but what is blowing out are loan sizes,” she said.

“Measures designed to curb people’s borrowing power will help prevent some from taking on risky levels of debt, however, first home buyers must be supported in the process.

“Any regulation changes must make provisions for younger Australians to still be able to enter the housing market,” she said.

What a cap on debt-to-income would look like

A ban or cap on new lending with a debt-to-income ratio of 6 or more would limit the amount many families could borrow to purchase a property.

Family buying a house: maximum borrowing capacity of average family if limited to a debt-to-income ratio of under 6

Note: Bank survivability tests would also apply and could potentially further limit people’s buying capacity.

Annual family income

(1.5 full-time wages)

Borrowing capacity with debt-to-income ratio under 6Median house priceBorrowing capacity required (20% deposit)Borrowing capacity required (10% deposit)
Sydney

$137,615

$824,316

$1,293,450

$1,034,760

$1,164,105

Melbourne

$136,555

$817,962

$954,496

$763,597

$859,046

Brisbane

$128,443

$769,371

$691,214

$552,971

$622,093

Adelaide

$122,452

$733,489

$568,110

$454,488

$511,299

Perth

$146,617

$878,233

$556,509

$445,207

$500,858

Hobart

$118,615

$710,501

$684,737

$547,790

$616,263

Darwin

$132,226

$792,031

$572,102

$457,682

$514,892

Canberra

$148,871

$891,736

$933,960

$747,168

$840,564

Notes: Family income is estimated at 1.5 times the average ordinary time earnings per state in original terms (ABS). Median house prices are from Core Logic August 2021 except Perth which is July 2021. Debt-to-income ratio of 5.99 is assumed. LMI costs not included.

Singles buying a unit: maximum borrowing capacity of an average worker if limited to a debt-to-income ratio of under 6

Note: Bank survivability tests would also apply and could potentially further limit buying capacity.

Annual wage Borrowing capacity with debt-to-income ratio under 6Median unit priceBorrowing capacity required (20% deposit)Borrowing capacity required (10% deposit)
Sydney

$91,744

$549,544

$825,514

$660,411

$742,963

Melbourne

$91,036

$545,308

$615,909

$492,727

$554,318

Brisbane

$85,628

$512,914

$425,777

$340,622

$383,199

Adelaide

$81,635

$488,992

$364,575

$291,660

$328,118

Perth

$97,744

$585,489

$404,257

$323,406

$363,831

Hobart

$79,076

$473,668

$523,856

$419,085

$471,470

Darwin

$88,150

$528,021

$349,698

$279,758

$314,728

Canberra

$99,247

$594,491

$525,971

$420,777

$473,374

Notes: Average wage is from the ABS Average Weekly Earnings, ordinary time earnings per state in original terms. Median unit prices are from Core Logic August 2021 except Perth which is July 2021. Debt-to-income ratio of 5.99 is assumed. LMI costs not included.

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This article was reviewed by Janet Lee before it was published as part of RateCity's Fact Check process.

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