Risk characteristics of mortgage lending ‘improving’, notes APRA

The Australian Prudential Regulation Authority (APRA) has welcomed the fact that the banks have been “improving” the risk characteristics of their new residential mortgage lending, after finding that both high debt-to-income (DTI) and high LVR lending had reduced over the September quarter.

After releasing the Quarterly Authorised Deposit-taking Institution (ADI) Performance and the Quarterly ADI Property Exposure publications for the quarter ended 30 September 2022, the prudential regulator suggested that the figures were largely promising given the strength of the banks’ profitability and liquidity positions as well as the reduction in “riskier” lending.

According to the figures, the banks funded $151.0 billion in loans in the three months to September, 10 per cent (or $17 billion) down on the same quarter in the record-breaking year of 2021. This decrease is from the series highs seen during the pandemic, influenced by the recent succession of cash rate target increases. 

However, it is still markedly above pre-pandemic levels - being 58.4 per cent above the September 2019 quarter.

As was the case last year, around 68 per cent of new home loans were for owner-occupiers, with just under 30 per cent for investors.  Interest-only lending remained relatively stable, increasing by 0.6 per cent in the September 2022 quarter compared to the previous June quarter. Interest-only loans as a share of residential mortgages outstanding was 11.1 per cent in the September 2022 quarter, unchanged from the June 2022 quarter.

However, with rising interest rates and growing cost-of-living pressures, the statistics showed that lenders are tightening up their risk characteristics when it comes to mortgages. 

For example, APRA deems mortgages with a DTI of six or more to be “riskier” and has been keeping a close eye on DTI after they reached a record-high level of 24.4 per cent in the December 2021 quarter. 

Indeed, the Organisation for Economic Co-operation and Development has previously flagged Australia’s high ratio of housing prices to household incomes, noting that in 2021, Australia had the fourth-fastest house price growth out of the world’s advanced economies over the past 20 years.

This translated to Australian borrowers often having to take on more debt from lenders to purchase increasingly expensive homes. 

However, the high DTI exposures have been falling this year, as rising interest rates and falling house prices reduce borrower appetite amid higher serviceability buffers.

Moreover, several lenders — including major banks — have been reducing their DTI thresholds this year.

The new APRA stats showed that the moves have been having their desired effect. For the September 2022 quarter, 17.1 per cent of total new mortgages had a DTI that was more or equal to six (in volume terms), down substantially from 23.3 per cent in the same quarter last year and a reduction from the 22 per cent recorded in the June 2022 quarter.

New lending at high loan-to-valuation ratios (over 90 per cent) also declined, falling from 7.5 per cent in September 2021 to 6.2 per cent in September 2022. 

APRA therefore noted: “The risk characteristics of ADIs’ new residential mortgage lending are improving..

"The fall in new residential mortgage lending with high DTI lending has been primarily driven by interest rate increases impacting maximum loan size and loan repayments. It has also been driven by APRA’s increase to the serviceability assessment buffer in October 2021, and a tightening of banks’ lending standards for this type of lending. 

"The share of new residential mortgages funded with exceptions to serviceability policy declined to 3.0 per cent in the September 2022 quarter, down from 3.1 per cent in the June 2022 quarter. The share of new residential mortgages funded with serviceability verifications waivers was 2.4 per cent in the September 2022 quarter, an increase from the June 2022 quarters’ 2.1 per cent."

The regulator also welcomed that the non-performing loan ratio improved in the quarter (falling by 0.05 percentage points to 0.82 per cent), with rising interest rates “yet to have a material impact on asset quality”.  

While lenders in Australia have been able to manage high DTI lending, the Reserve Bank of New Zealand (RBNZ) or Te Pūtea Matua, is currently seeking feedback on the design of the regulatory framework for debt-to-income (DTI) restrictions.

While it has not yet made a decision to activate DTI restrictions (and is not yet consulting on a particular DTI setting at this stage), it is looking at bringing in a ‘speed limit’ for DTI restrictions. For example, it could be set at a maximum of 20 per cent of new mortgage lending (the speed limit) at a DTI over seven (the threshold or cap). The speed limit would be set based on the value of new loans, rather than the number of loans, according to New Zealand’s central bank.

[Related: Fewer high-DTI loans being written]