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The prudential regulator has announced it will limit high debt-to-income (DTI) home lending after identifying potential housing-related risks in the financial system.
The Australian Prudential Regulation Authority (APRA) has announced banks will be barred from lending more than 20 per cent of new home loans with a debt-to-income (DTI) ratio of six or more as the regulator clamps down on risky lending.
APRA said the decision followed an uptick in riskier forms of lending over recent months amid falling interest rates, an increase in housing credit growth and a rise in housing prices.
The regulator said that the trends suggested a potential build-up of vulnerabilities that could impact the banking sector and household financial resilience if left unchecked.
“In particular, high DTI lending has started to pick up, albeit from a low base, driven by high DTI loans to investors,” it said.
“This is expected to increase further in this part of the cycle, and already high household indebtedness could increase further.”
From 1 February next year, authorised deposit-taking institutions (ADIs) will only be able to lend up to 20 per cent of their new mortgage lending at a debt-to-income ratio of six times or more.
“The limit will apply separately to ADIs’ owner-occupier and investor lending,” APRA said.
The organisation said at an aggregate level, the limit was not currently binding, meaning the change was not expected to have a near-term impact on borrowers’ access to credit.
“Only a small number of ADIs are expected to be near the limit for high DTI investor lending at this stage,” it said.
It said that the limit was expected to have a greater impact on investors, given that they usually borrowed at higher DTI ratios than owner-occupiers.
APRA chair John Lonsdale said one of the regulator's concerns was rising household indebtedness, which has often been associated with riskier lending and rapid property price growth.
“At this point, the signs of a build-up in risks are chiefly concentrated in high DTI lending, especially to investors,” he said.
“By activating a DTI limit now, APRA aims to pre-emptively contain risks building up from this type of lending and strengthen banking and household sector resilience,” he concluded.
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