Risky lending drops again, as tougher APRA rules kick in

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

APRA’s Quarterly ADI Property Exposure report for the June 2022 quarter, released yesterday, shows 22.1 per cent of new mortgages had a debt-to-income ratio of six times or more, in dollar terms.

This is down 1.0 percentage point from the March quarter (23.1 per cent) and is the second quarterly drop in a row, coming off a record high level in the December 2021 quarter (24.3 per cent).

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 (above their current rate).

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

Source: APRA Quarterly ADI Property Exposures for June 2022, new lending, ADI’s, released 6 Sept 2022.

Offset balances dip slightly in the June quarter

The total amount in residential offset accounts dropped slightly to $225.71 billion in the June quarter, down $2.34 billion (-1.0 per cent) from a record high in the previous quarter. 

This is despite the fact only a small portion of the June quarter was impacted by the RBA rises, if any. This is because RBA cash rate hikes take more than a month, but in some cases up to three months, to hit people’s bank accounts.

Compared to a year ago, the total balance in offset accounts increased $29.20 billion or 14.9 per cent.

Offset account balances – outstanding loans

Source: APRA Quarterly ADI Property Exposures for June 2022, outstanding loans ADI’s, released 6 September 2022.

Source: APRA Quarterly ADI Property Exposures for June 2022, outstanding loans ADI’s, released 6 September 2022.

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

• New investor lending, as a share of all new term loan rose was 30.9%, which was similar to the previous quarter but up 3.1% points year-on-year.
• New interest-only loans, as a share of all new term loans was 20.0%, up 0.8% points from the previous quarter and up 1.6% points year-on-year.
• Loans with a loan-to-value ratio of 90% or more was 6.4%, that’s down 0.9% points from the previous quarter and down 2.2% points, year-on-year, as a proportion of all new term loans.

RateCity.com.au research director, Sally Tindall, said: “This data shows APRA’s stricter serviceability test is doing its job, with the value of risky lending falling for the second quarter in a row.”

“We expect high debt-to-income lending will continue to drop as rising rates put the brakes on how much people can borrow from the bank,” she said.

“APRA’s stricter lending rules were introduced at a time when interest rates were at record low levels and people were taking on concerning levels of debt compared to their incomes. As the cash rate returns to more normal levels, we could see APRA lower the 3 per cent stress test back down to 2.5 per cent,” she said.

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