Risky loans on the rise, but APRA bats away concerns

Record low interest rates have triggered a rush towards the property market, raising concerns that borrowers are overextending themselves in a bid to purchase their dream home. 

Recent data from APRA shows the share of new borrowers with a debt-to-income (DTI) ratio of six or higher rose by 17.2% over the December 2020 quarter. The number of high LVR home loans also reached 42%, up from 39.9% in the previous quarter. 

But the industry regulator has shown no sign it intends to intervene, saying that overall lending processes had not yet begun to deteriorate.

“Despite the increase in new higher LVR lending in the December 2020 quarter, the majority of outstanding residential mortgage loans remain well covered by collateral,” it said.

“The share of high DTI lending in the December 2020 quarter is within its historical average, and does not indicate a significant change in lending conditions.”

The percentage of interest-only loans has also been trending downwards. In the December quarter they made up 14.5% of outstanding term loans, down from 15.2% in the previous period.

CoreLogic head of residential research, Eliza Owen said the increases in high DTI and LVR lending were “not likely to be large enough to trigger a regulatory response,” but a tightening of credit policies should be expected if the trend continues.

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Regulators will be monitoring the Sydney and Melbourne property markets in particular, given that house price to income ratios have historically been the highest in the two major cities.

“As housing prices rise at a time when incomes are expected to remain relatively flat, there is the potential for both loan-to-income and debt-to-income ratios to lift further, which is likely to be seen as a riskier outcome by regulators,” Owen said.

A lift in mortgages lent on interest-only terms could also see household debt get out of hand, particularly if the RBA decides to raise official interest rates in the coming years. 

Despite this, the government is currently mulling over the repeal of responsible lending laws, which it hopes will free up the flow of credit further still.

The proposed changes have drawn criticism, especially since existing guidelines haven’t necessarily inhibited borrowing, with ABS data showing residential mortgage lending increasing by 10.5% in January alone. 

But industry figures have spoken out in favour of the changes, with NAB CEO Ross McEwan arguing that deregulation will not lead to an increase in risky loans but an improved application experience for borrowers.

“We have no interest in lending money to customers who can’t pay it back because the customer loses and the bank loses,” he said at a parliamentary hearing last week.