How APRA caps could impact how much Australians can borrow

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Consumer advocate RateCity.com.au welcomes news APRA is considering changes to address growing risk in the Australian home loan market.

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

Although the regulator is focusing on lending standards, the changes being considered should help cool house prices. Any new policy response must also ensure that first-time home buyers are not unfairly affected.

The discussion follows figures released this month showing that 21.9% of all new loans funded in the June quarter had a debt-to-income ratio of six or more, which is considered risky by the government. APRA.

This is an increase from 16% of all new loans funded in the June 2020 quarter.

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

Quarter June 2020 Quarter June 2021
16.0% of all new loans 21.9% of all new loans

Source: APRA quarterly statistics on authorized deposit-taking institutions, all ADIs, published in September 2021.

What APRA’s loan limits could potentially include:

Potential changes Details Advantages The inconvenients
Debt-to-Income Ratio Limits Limit 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 reduce investors who buy multiple properties.

Could create a barrier for first-time home buyers unless exemptions are granted.
Strengthening service requirements Impose floor maintenance rates or increase buffers. Currently, banks are testing loans at 2.5% higher rates or their floor, whichever is greater. The average floor of the 4 big banks is 5.09%. Will help protect people from mortgage stress when rates rise. Could have an unfair impact on first-time home buyers.
Investor loan limits Limit lenders to a set proportion of new investor loans. From December 2014 to April 2018, APRA limited banks to 10% growth in investor loan portfolios. Reduces the number of investors competing with first-time buyers and other homeowners. Loans to investors remain proportionately at acceptable levels. The previous cap had limited success in cooling house prices.
Low loan-to-value ratio ceilings Limit the number of new loans with small deposits. Limits may vary depending on the type of borrower (investors are likely to be required to have larger deposits). Reduces risk in credit portfolios, especially in the event of falling property prices. May unfairly target first-time buyers unless exemptions are granted. The proportion of loans with low deposit rates has declined in the most recent APRA data.
Interest limit only Limit the number of new interest-only loans. Between March 2017 and December 2018, banks were required to limit lending at interest only to 30% of new loans. Encourages borrowers to repay their debt, protecting them when rates rise. Could deter investors. Interest-only loans are currently well below the previous limit and are therefore not required.
Combination of the above APRA could put in place a cap that considers a combination of levers to reduce risk without penalizing first-time buyers.

RateCity.com.au’s research director Sally Tindall said APRA’s intervention would be welcome, however any new macroprudential policy action should be carefully considered.

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

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

“Any regulatory change must include provisions so that young Australians can still enter the housing market,” she said.

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

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

Family buying a house: maximum borrowing capacity of an average family if it is limited to a debt-to-income ratio of less than 6

Note: Bank survival tests would also apply and could potentially further limit people’s ability to buy.

Annual family income

(1.5 full-time salaries)

Borrowing capacity with a debt-to-income ratio of less than 6 Median house price Borrowing 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 income per state in terms of origin (ABS). Median house prices are from Core Logic for August 2021, excluding Perth, which is July 2021. A debt-to-income ratio of 5.99 is assumed. IMT fees not included.

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

Note: Bank survival tests would also apply and could potentially further limit purchasing capacity.

Annual salary Borrowing capacity with a debt-to-income ratio of less than 6 Median unit price Required borrowing capacity (20% deposit) Required borrowing capacity (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 salary is taken from average weekly earnings in ABS, ordinary time earnings by state in original terms. Median unit prices are from Core Logic as of August 2021, excluding Perth, which is July 2021. A debt-to-income ratio of 5.99 is assumed. IMT fees not included.


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