The banking regulator has swapped one lending curb for another as Australia’s lending crackdown continues. But new debt-to-income curbs could see many priced out of the property market.
At first glance, it would appear that APRA has reopened the floodgates for banks to turbocharge lending to property investors after announcing that its 10 per cent benchmark will be removed.
Price was the natural lever for the banks to pull when the 10 per cent cap came into play four years ago, and the banks have no doubt profited from the regulator’s actions.
What brokers and their customers will now be waiting to see is whether the removal of the cap will cause banks to lower their rates. Four years is a decent amount of time, but not too long to forget that many of the banks used APRA’s 10 per cent cap as an excuse to hike rates multiple times since 2014. Without the cap, it would make sense for them to begin reducing rates. That is, of course, if their interests are aligned to their customers’. Unfortunately, as the Hayne royal commission is discovering, listed mortgage providers also have shareholders to satisfy and profits to make.
APRA isn’t simply scrapping its cap on investor loan growth — it is doing so on the proviso that the banks “maintain a firm grip on prudence of both policies and practices”. Failure to do so will see the 10 per cent benchmark continue to apply.
Confident that the 10 per cent cap has “served its purpose”, APRA is now training looking at Australia’s ballooning household debt woes.
With investors suitably calmed, the regulator wants to ensure that banks don’t go crazy and start lending to people who are leveraged to the hilt.
APRA chairman Wayne Byres explained that, with the 10 per cent cap now gone, ADIs will be expected to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers.
“This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for,” the chairman said.
This will most likely come in the form of loan-to-income (LTI) limits, similar to those that regulate the UK mortgage market.
Some Australian banks have already started reducing how much people can borrow. For example, late last year NAB announced that its LTI ratio would be capped at 8. In February, this was tightened to 7, meaning that a person earning $100,000 can only borrow a maximum of $700,000.
The monthly mortgage repayments on a $700,000 P&I mortgage (25-year term) at a variable rate of 5.24 per cent are $4,191.
A person earning a gross income of $100,000 (not including superannuation and provided they don’t have any student debt) receives an after-tax monthly income of around $6,100.
This means that more than two-thirds, or 68 per cent, of their take-home pay will go to mortgage repayments.
While lenders are likely to reduce their LTI ratios in accordance with APRA’s new guidelines, there is only so far they can go before borrowers are forced out of expensive markets like Sydney, where the average house price is $1.15 million and the average unit sells for $740,000.
At these prices, it’s hard to see a mortgage under $700,000 doing much for a Sydney home buyer. Particularly when the average Sydney household earns $91,000 a year (ABS 2016 Census of Greater Sydney). An increased focus on living expenses will also no doubt see borrowing power further impacted.
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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