APRA Imposes 20% Cap on High Debt-to-Income Home Loans to Constrain Riskier Lending
The Australian Prudential Regulation Authority (APRA) is moving to limit high debt-to-income (DTI) home lending, a measure designed to pre-emptively contain the build-up of housing-related vulnerabilities within the financial system. The banking regulator is ordering institutions under its supervision to cap high debt-to-income loans at 20 per cent of all new loans approved.
This new regulatory cap will take effect on February 1 next year.
Details of the New Limit
A high debt-to-income loan is defined as one where the amount borrowed is more than six times the borrower’s annual household income.
From the implementation date, authorised deposit-taking institutions (ADIs) will be allowed to lend up to 20 per cent of their new mortgage lending at a debt of six times income or more. Importantly, this limit will be applied separately to ADIs’ owner-occupier and investor lending.
APRA Chair John Lonsdale stated that the regulator is not prepared to delay action while housing-related vulnerabilities build up. Lonsdale highlighted that high household indebtedness is a key structural risk to system stability that APRA has long been concerned about.
“Rising indebtedness has in the past often been associated with an increase in riskier lending and rapid growth in property prices,” he added.
Rationale Behind the Move
While APRA acknowledges that overall bank lending standards remain sound, the Authority has observed a recent pick-up in some riskier forms of lending. This increase coincides with falling interest rates, housing credit growth accelerating above its longer-term average, and housing prices rising further.
These dynamics suggest a shift in the financial risk cycle and a potential build-up of vulnerabilities that could undermine both banking sector and household financial resilience if unchecked. In particular, APRA noted that high DTI lending has started to pick up, driven primarily by high DTI loans being granted to investors.
Mr. Lonsdale explained that the signs of a build-up in risks are currently concentrated in high DTI lending, “especially to investors”. By activating a DTI limit now, APRA aims to pre-emptively contain risks from this type of lending and strengthen overall resilience.
APRA noted that strong investor activity can amplify housing lending and price cycles that impact financial stability, but confirmed that they are “not yet seeing signs of the broad-based build-up of housing vulnerabilities including a deterioration in lending standards that we have seen in previous episodes of strong investor activity”.
Expected Impact
At an aggregate level, the 20 per cent limit is not currently binding. Therefore, the limit is not expected to have a near-term impact on borrowers’ access to credit.
However, the limit will serve as a guardrail. Should levels of high DTI lending rise toward the 20 per cent cap in the coming period, the limit is expected to have a greater impact on investors, who tend to borrow at higher DTI ratios than owner-occupiers.
To enable the smooth functioning of property transactions and avoid constraining incentives for the supply of new housing, APRA’s DTI limit specifically excludes:
- Bridging loans for owner-occupiers.Loans for the purchase or construction of new dwellings.
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APRA has stated that it will consider additional limits, including investor-specific limits, if macro-financial risks significantly rise or if a deterioration in lending standards is observed.
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