Two of Australia's biggest banks have moved to curb high-risk home lending, as the regulator revealed it has been warning some institutions to cut back on risky loans.
This week, ANZ told mortgage brokers and its bankers that from June 6 it would no longer make loans to borrowers who would owe more than seven-and-a-half times their annual income.
That is down from a previous cap of nine times income.
Earlier this month, NAB lowered its debt-to-income (DTI) limit from nine to eight times income.
These moves have the effect of reducing the maximum amount a home buyer or someone refinancing can borrow from what was previously possible.
"ANZ regularly reviews lending appetite and policies as the economic environment changes to ensure we are continuing to lend prudently to our customers," a spokesperson for the bank told ABC News.
Speaking at the AFR's Banking Summit, ANZ's head of retail banking, Maile Carnegie, this morning said the change had in part been in response to concerns from the banking regulator APRA about the rising level of loans with a DTI ratio of more than six, which it considers risky.
Almost a quarter of new loans had a DTI of six or above in the second half of last year, although Ms Carnegie said very few loans came close to ANZ's previous cap of nine times income.
APRA warns some banks to lift standards
Speaking at the same banking conference just hours later, APRA chairman Wayne Byres confirmed the regulator had contacted some banks with concerns about the level of high DTI loans they were issuing.
"We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year," he told the AFR summit.
"We therefore opted to tackle our concerns on a bank-by-bank basis, rather than opt for any form of macroprudential response.
"We expect lending policy changes at those banks, coupled with rising interest rates, will see the level of high DTI borrowing begin to moderate in the period ahead."
In a written statement, NAB executive Kirsten Piper said the bank is "committed to lending responsibly" to "ensure customers are able to appropriately manage their repayments, both today and in the future."
Westpac and CBA both told ABC News they had not made recent changes to their policies around high debt-to-income ratio loans.
Westpac said all loans with a DTI of seven or more are sent for "manual assessment" by its credit team.
The ABC understands this process involves more experienced bankers looking at the applicant's employment history, income and the quality of their security (that is, the valuation on their assets, especially the mortgaged property) before either approving or declining the loan.
CBA said loans with a DTI or six or greater and a high loan to value ratio are subject to "tighter lending parameters".
'Pockets of stress likely'
APRA started increasing its vigilance around home lending in October last year, when it announced an increase in the minimum mortgage serviceability buffer.
That meant that, from November, new borrowers had to be tested to see if they could cope with interest rates at least 3 per cent above their current rate, up from 2.5 per cent previously.
RateCity's research director Sally Tindall said that change, combined with rising interest rates, will have a much bigger effect on how much people can borrow.
"Debt-to-income ratios are one small piece in the serviceability equation. Rising interest rates, in particular, are far more likely to have an impact on people's home loan applications moving forward," she told ABC News.
"This is likely to help reverse the trend of rising debt-to-income ratios without the need for further market-wide regulation."
Mr Byres said the regulator was not worried about the potential for widespread home loan defaults across the banking sector, but it was concerned that some borrowers, especially recent ones, may be under severe financial stress.
"We are now entering a very different environment than has existed for much of the past decade," he said.
"The faster-than-expected emergence of higher inflation and interest rates will have a significant impact on many mortgage borrowers, with pockets of stress likely, particularly if interest rates rise quickly and, as expected, housing prices fall.
Negative equity is a situation where borrowers owe more to the lender than their property is worth.
Recent borrowers with small deposits are particularly at risk if home prices fall.
Ms Tindall said those risks should cause prospective home buyers to think carefully about how much they are willing to borrow.
"While the banks will still approve loans with a debt-to-income ratio of six or more, provided they pass the banks' other serviceability tests, borrowers should know this type of lending is considered risky by the regulator," she said.
"If you're looking to take out a new loan, don't rely on your bank to tell you how much you can borrow. Work out what your monthly repayments would look like if rates rose by up to three percentage points but also think about how much debt you're taking on. Property prices can go up and down, but that won't make your debt magically disappear.
"You might decide that being shackled with an excessive amount of debt for the next 30 years isn't actually worth it."
