Regulators to reform home lending as property prices continue to rise

High debt-to-income ratios will be the focus of home loan reforms signalled by Treasurer Josh Frydenberg this week.

While no definitive plans have been laid, regulators are faced with the task of curbing risks associated with high-debt home loans that have risen in a property market with record-low interest rates and surging housing prices. 

This comes after calls for a crackdown on growing property prices by the International Monetary Fund (IMF) and big banks CBA and ANZ.

What is a debt-to-income ratio?

This term’s meaning is relatively evident in its name: debt-to-income ratio represents the amount of debt owed by an individual or household compared to their annual income. This can refer to overall debt, which might come in the form of money owing on a personal loan, credit card, home loan or a combination of many sources of credit.

According to the most recent lending data from the Australian Prudential Regulation Authority (APRA), high-debt home loans have seen considerable growth. Borrowers who took on home loan debt in the June quarter that was at least six times greater than their income jumped from 16% this time last year to almost 22%.

A high debt-to-income ratio could become a problem if a borrower is no longer able to comfortably meet loan repayments due to things like loss of income, mortgage interest rate rises or other unexpected financial obligations.

Will home loan reforms mean I can’t afford to buy property?

It isn’t the role of financial regulators like APRA or the Reserve Bank of Australia (RBA) to actively curb rising house prices. But they are responsible for maintaining the stability of the economy. This means that whatever solutions regulators come up with in the weeks and months ahead, it’s likely to happen in increments to balance the financial wellbeing of various actors. 

Rising debt-to-income ratios will be a key focus, and therefore investors may be facing more pressure than buyers who plan to occupy their homes. This is because owners of investment properties commonly have higher levels of debt from leveraging equity in existing properties to take out additional financing.

So, will this mean your home loan application is more likely to be rejected? The answer to this question really depends on the type of borrower you are, your income, your existing debt and the price bracket of the property you’re looking to buy. 

In short, it could impact you. But especially when it comes to first home buyers, the government and regulators are looking to balance safe lending practices with market access to ensure home ownership remains feasible for Australians. 

The tightening of lending conditions could have a gradual flow-on effect of slowing property price rises, as limited financing may reduce buyer competition. 

What is a ‘liar loan’?

A ‘liar loan’ refers to someone providing inaccurate information on loan applications in order to be perceived more favourably as a potential borrower.

Various reports on an annual survey from investment bank UBS have noted an increase in inaccurate loan applications following alongside rising house prices. These reports detail UBS data as finding around 41% of the 900 mortgage holders surveyed saying they had submitted factually incorrect information on their home loan applications.

The most commonly reported areas of inaccuracy were under-representing living costs (34%) and existing financial commitments (28%), as well as over-representing income (22%).

UBS has been collecting this kind of data since 2015 in its annual survey, with the first survey recording only 27% of people admitting to submitting ‘liar loans’.

So, can I still get a home loan?

Yes, while some broad regulatory changes may be in the works, that won’t necessarily stop you from finding a mortgage to suit your needs. It’s always helpful to be prepared financially before taking on this kind of significant debt, and to understand exactly what you’re committing to when you take out a home loan.

So, be sure to check out our home loan guides for all the essential info. There’s also plenty of opportunity to compare home loan features and costs with Mozo, and you can start with a few of the options below.