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Risky debt drops slightly as APRA’s stricter home loan rules bite

Risky debt drops slightly as APRA’s stricter home loan rules bite

The value of new mortgages with risky levels of debt has dropped slightly, according to new data released by APRA.

APRA’s Quarterly ADI Property Exposure report for the March 2022 quarter shows 23.1 per cent of new mortgages had a debt-to-income ratio of six times or more, in dollar terms.

This is down from the record high of 24.3 per cent in the previous quarter, but still significantly higher than a year ago.

Debt-to-income ratios of six and over are considered risky by APRA.

In November 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 their interest rate rose by 3 per cent.

This is the first full quarter of data where banks stress tested new home loan applications at 3 per cent.

The value of risky lending is likely to drop further in coming quarters, as rising interest rates reduce the maximum amount people can borrow from the bank.

Proportion of new mortgages with a debt-to-income ratio of six times or more

March quarter 2022Last quarter (Dec 2021)1 year ago (March 2021)
Debt-to-income of 6 times or higher

23.1%

24.3%

(-1.2% points)

18.9%

(+4.2% points)

Source: APRA Quarterly ADI Property Exposures for March 2022, new lending, ADI’s, released 14 June 2022.

Offset balances hit another record high of $228 billion

The total amount in all residential offset accounts rose to $228.05 billion in the March quarter, up $5.10 billion from the previous quarter and $28.28 billion more than a year ago.

This total could drop in coming quarters if the RBA continues to hike official rates and people start to dip into their savings to keep up with their growing monthly repayments.

Offset account balances – outstanding loans

March quarter 2022Change from previous quarterChange from
1 year ago

$228.05 billion

Record high

$5.10 billion
+2.3%

$28.28 billion
+14.2%

Source: APRA Quarterly ADI Property Exposures for March 2022, outstanding loans ADI’s, released 14 June 2022.

APRA’s March Quarterly ADI Property Exposure report – other key statistics:

  • New investor lending, as share of all new loans, rose 2.3% points from the previous year (March 2021 quarter) to 30.9%.
  • New interest-only loans, as a share of all new lending, fell 0.3% points from the previous year to 19.2%.
  • Loans with a loan-to-value ratio of 90% or more fell by 3.1% points to 7.3% of all new lending.

RateCity.com.au research director, Sally Tindall, said: “This new data shows APRA’s stricter serviceability test is beginning to have an impact on the ground.”

“While no one likes to be told ‘no’ from their bank, stopping people from taking on risky levels of debt is a good thing,” she said.

“We expect high debt-to-income lending will continue to drop throughout the year as rising interest rates put a handbrake on people’s borrowing capacity.

“The higher rates go, the less some people will be able to borrow from the bank. This should see fewer households take on debts that are grossly out of proportion to their incomes.

“RateCity.com.au research shows a single person earning $100,000 today, could see their maximum borrowing capacity drop by almost $130,000 in less than a year if the cash rate gets to 2.35 per cent, as forecast by Westpac and NAB.

“APRA introduced the 3 per cent stress test at a time when rates were at record lows and debt-to-income ratios were at near record highs. Once the cash rate gets back to a more normal level, we could see APRA drop this stress test back down to 2.5 per cent.

“It’s great to see some Australians were still funnelling money into their offset accounts in the lead up to the cash rate hikes, ready for a rainy day.

“While many people have record levels of money at the ready in their offset accounts, not everyone is fortunate enough to be in this position.

“Some people are already struggling to keep up with the soaring cost of living, with no decent buffer to fall back on,” she said.

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This article was reviewed by Data Research Specialist Piyush Pillai before it was published as part of RateCity's Fact Check process.

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