Clancy Yeates| 18 June 2018| Sydney Morning Herald
Property investors seeking to borrow many times their income are tipped to come under increased scrutiny, as banks respond to regulatory pressure to restrict higher-risk mortgage lending.
Following a direction from the Australian Prudential and Regulation Authority (APRA) in April, banks are grappling with how to set what the regulator calls “internal risk appetite limits” on new lending to customers borrowing more than six times their income.
APRA told banks to develop such policies a month and a half ago, and gave them an incentive to do so. It will only lift a 10 per cent limit on housing investor credit growth when banks have limits in this area, as well as other “sound” lending policies and practices.
Commonwealth Bank has in recent weeks told mortgage brokers it will monitor loan applications with a debt-to-income ratio above 4.5 times, while those with ratios of seven times or higher will have to be approved manually by credit departments.
Several of its key rivals are also considering APRA’s call for maximum debt-to-income ratios, and analysts say banks’ changes in this area could be a further drag on the home loan market.
Indeed, the focus on loans with high debt-to-income ratios is being seen as the third wave of APRA’s macroprudential policies, following its 10 per cent cap on housing investor loans introduced in 2014, and last year’s cap on new interest-only lending.
Managing director of mortgage broker Homeloanexperts.com.au, Otto Dargan, said APRA’s move on high debt-to-income ratios was “clever” because it would most likely affect highly geared property investors such as those some with multiple properties, but not other investors or owner-occupiers.
“It’s going to affect highly geared investors – think of it as a replacement for the 10 per cent investor loan cap,” Mr Dargan said. “We are expecting the impact to be in a few months’ time when other banks start to implement similar restrictions.”
With banks already tightening how they assess customers’ living expenses, analysts say putting limits on lending to highly-geared customers could be another factor that causes the $1.6 trillion mortgage market to grow more slowly than in the past.
Moody’s cited the issue in a note last week that explored the prospect of a slowdown in the credit market. “We expect banks to continue to strengthen their underwriting criteria, including the potential introduction of debt-to-income caps,” the ratings agency said.
Morgan Stanley analyst Richard Wiles said last week that tighter limits in this area were one factor that would cut the rate of credit growth.
CBA’s recent move to introduce a new policy for highly geared borrowers comes after National Australia Bank in February lowered its cap on maximum loan-to-income ratios to seven times, down from eight times.
An ANZ spokesman said the bank had responded to APRA last month, outlining its position on investor lending, how the bank was meeting “unquestionably strong” capital requirements, and measures put in place for future investor lending.
Westpac, which said in May that loans with a loan-to-income ratio of more than six times made up 8 per cent of its mortgage portfolio, does not have a cap at the moment but is understood to be reviewing its approach.
APRA’s public letter to the industry in late April said a debt-to-income ratio of more than six times was “very high”.
CBA’s executive general manager of home buying, Daniel Huggins, said the debt-to-income policy was part of the bank’s responsible lending commitments.
“At the Commonwealth Bank we constantly review and monitor our home loan processes and policies to ensure we are maintaining our prudent lending standards and meeting our customers’ home buying needs,” he said in a statement.
“Our decision to implement a new debt-to-income measure is just another example of our ongoing commitment to responsible lending and meeting our regulatory commitments.”