With surging interest rates making it harder for Australians to borrow large sums relative to their incomes, the share of risky lending has dipped in recent months, new figures showed.
But there were looming concerns for the recent home buyers who borrowed at rock-bottom fixed rates and who would be hit with higher mortgage repayments when they refinance next year.
APRA data showed the share of new lending at high debt-to-income ratios has slipped 7.2 percentage points from its peak in the December quarter of 2022, when nearly a quarter of home loan borrowers were taking on large debts that were six times their incomes or more, to 17.1% in the September quarter of 2022, The Sydney Morning Herald reported.
When prices were increasing last spring, but interest rates weren’t anticipated to lift for years, then-treasurer Josh Frydenberg backed regulators to crack down on high-debt home loans. But with the cash rate rising sooner than expected in May, the amount of money that home buyers could borrow had been reduced.
“Last year, in the midst of the property boom, there was a concern that people were taking out more risky loans, given the surge in prices,” said Shane Oliver, AMP Capital chief economist.
Soon after, banks were forced to check whether borrowers could meet their loan repayments if interest rates increased 3%, up from the previous test of 2.5%.
“At the time, there was a feeling that the central bank should raise interest rates, but it was seen as premature,” Oliver said, adding these other tools were considered to take the pressure off the property market. “Things moved fairly quickly, and we moved towards a big rise in interest rates, and so that’s been doing the job for them, they haven’t had to do more macroprudential controls. When interest rates are higher, regardless of your income you can’t borrow as much as you previously could and so the outworking tends to be smaller loans relative to people’s incomes.”
Also helping cut the amount of money Aussies needed to borrow to buy a home were falling property prices, Oliver said.
Now, what the regulator sees as the biggest risk is not today’s borrowers, who cannot borrow as much due to higher interest rates.
“They’d probably be worried about existing borrowers, particularly people on the ultra-low fixed rates from the last couple of years,” Oliver said. “We’ve raised rates 3%, so anyone borrowing from October last year on a variable rate would be at the limit of the serviceability test. Anyone who borrowed before that would have gone above it.”
Unemployment was still low, he noted, which meant the regulator may not be overly concerned right now, but this could change if unemployment begins to increase.
Theo Chambers, Shore Financial chief executive, said there were many would-be buyers who were still trying to borrow to their limit, but banks will not be making it easy for them to do so.
“People are still borrowing six times their incomes, they’re still trying to squeeze every possible mechanism to get the bank to lend,” Chambers said. “Of course, the banks make you jump through hoops and especially at the moment, more than ever.”
He said some banks are fixing how they factor in the rising cost of living, or how income received in the form of bonuses will be assessed.
“Banks are definitely going a bit more cautious,” Chambers said.
Chris Foster-Ramsay, principal broker at Foster Ramsay Finance, said that after APRA put pressure on lenders, borrowers taking out large loans compared to their incomes had become less common.
Increasing interest rates had also slashed borrowing capacity, which addressed the issue of large loan sizes.
“Rates go up, borrowing capacity goes down, by default debt-to-income remains, in most cases, not an issue,” Foster-Ramsay told SMH. “They still want to borrow as much as possible to buy the property that’s near family, or the shops or schools, they don’t want to move out of the area. That hasn’t changed in the last six to 12 months.”
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