The value of new mortgages with risky levels of debt has continued to decline, new APRA data showed.
The prudential regulator considers debt-to-income ratios of six and over as risky.
According to APRA’s Quarterly ADI Property Exposure report for the June 2022 quarter, 22.1% of new mortgages had a debt-to-income ratio of six times or more, in dollar terms – that’s down one percentage point from the March quarter’s 23.1% and was the second consecutive quarterly drop, coming off a record-high level in the December 2021 quarter’s 24.3%, RateCity.com.au reported.
In November 2021, APRA responded to rising debt-to-income levels by lifting the rate at which banks stress test mortgages from 2.5% to 3%. 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%.
The total amount in residential offset accounts dipped by -1%, or $2.34 billion, to $225.71 billion in the June quarter, from a record high in the previous quarter.
This was despite the fact that only a small portion of the June quarter was impacted by the RBA hikes, if any. This is because it takes more than a month, in some cases up to three months, for the RBA cash rate hikes to hit people’s bank accounts.
Compared to a year ago, the total balance in offset accounts increased $29.20 billion, or 14.9%.
Sally Tindall, RateCity.com.au research director, said the value of risky lending falling for the second quarter in a row “shows APRA’s stricter serviceability test is doing its job.”
“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,” Tindall 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% stress test back down to 2.5%.”
