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Banks tightening lending and rates on the rise: how much can you still borrow?
Some of Australia’s biggest banks have tightened their lending standards as more and more applicants for home loans are applying with debt-to-income ratios of up to nine times their income.
But with the median house price still high and wage growth still low, could some borrowers be priced out of their city?
Last week, ANZ announced it would no longer accept applications from borrowers with a debt-to-income (DTI) ratio greater than 7.5 times their income. This was lowered from a previous level of DTI ratios up to nine times.
And in May, NAB revealed it would reduce its DTI limit for home loan applicants from nine times to eight times their income.
These DTI ratio thresholds are still considered high, but when you consider the median dwelling price in a capital city versus the average full-time income, taking out a loan potentially seven to nine times your income is not uncommon.
And with interest rates on the rise following a Reserve Bank of Australia cash rate hike for the first time in over 11 years, the era of cheap debt may be ending.
Last year, APRA tightened lending rules and requested banks stress test mortgages at a higher interest rate when assessing customer applications. This move came off the back of soaring property prices and gigantic loan sizes. At the time, almost a quarter of new loans (21.9%) had a DTI ratio of six or more, which is considered risky lending.
What are the limits of what you can borrow on your income?
There are a number of factors that a lender will assess when determining how much you may be eligible to borrow for a home loan. This includes your deposit size, your credit score, your expenses, and any dependents.
That being said, for hypothetical sake you can still look at different annual incomes and determine what the maximum they may be approved to borrow is, based on different DTI ratios.
Borrowing limits based on income and risky DTI ratios
| Annual Income | DTI ratio of 6 | DTI ratio of 7.5 | DTI ratio of 8 |
$60,000 | $360,000 | $450,000 | $480,000 |
$70,000 | $420,000 | $525,000 | $560,000 |
$80,000 | $480,000 | $600,000 | $640,000 |
$90,000 | $540,000 | $675,000 | $720,000 |
$100,000 | $600,000 | $750,000 | $800,000 |
$120,000 | $720,000 | $900,000 | $960,000 |
$150,000 | $900,000 | $1,125,000 | $1,200,000 |
$175,000 | $1,050,000 | $1,312,500 | $1,400,000 |
$200,000 | $1,200,000 | $1,500,000 | $1,600,000 |
Source: RateCity.com.au
Median dwelling price in each capital city
| Capital city | Median dwelling value |
| Sydney | $1,120,836 |
| Melbourne | $806,196 |
| Brisbane | $779,895 |
| Adelaide | $628,744 |
| Perth | $555,538 |
| Hobart | $738,399 |
| Darwin | $504,306 |
| Canberra | $940,026 |
Source: CoreLogic Home Value Index as at 31 May, 2022.
The latest Australian Bureau of Statistics data shows that the average full-time adult weekly ordinary time earnings are $1,748, which amounts to an annual salary of $90,917.
While that may seem high, keep in mind that the latest CoreLogic data shows that the median dwelling value in Sydney is still $1.12 million.
Meaning that an individual earning $90,917 would still not be able to qualify for a home loan for a property of this value on their own, even with a 20% deposit of $224,167. This is because the home loan would be valued at $896,669 and still almost ten times their income.
And while banks putting in place limits for high-risk lending is in the best interest of borrowers, in a time of such high property prices it begs the question of who can even afford to take out a home loan in costly cities like Sydney or Melbourne? Especially for single applicants not relying on a dual income.
Disclaimer
This article is over two years old, last updated on June 7, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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Product database updated 18 Nov, 2024
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