High DTI ratio loans continue to rise

The Australian Prudential Regulation Authority (APRA) has released the Quarterly Authorised Deposit-taking Institution (ADI) Performance and the Quarterly ADI Property Exposures publications for the quarter ended September 2021.

Over the three months to September, banks funded $167.8 billion in new loans, the largest amount in recent history, and a 48.2 per cent increase on 2020 figures.

The third-party channel (i.e. mortgage brokers) wrote 58 per cent of all ADI loans in the quarter (or $97.3 billion), the APRA figures showed. This marked a 3 percentage point increase on the same quarter the year prior – and is the highest proportion recorded for this data series.

Both owner-occupied and investor lending grew to new highs over the quarter, with just over $115 billion of owner-occupied loans funded (69 per cent of the total) and $48.9 billion in investor loans written (29.3 per cent of the total) in the three months to September.

Notably, the quarterly figures also showed that higher debt-to-income ratio lending had occurred in the quarter “influenced by the low interest rate environment, increasing house prices and relatively low wage growth”.

Nearly a quarter of new residential mortgages (23.8 per cent) funded over the three months to September 2021 had a debt-to-income ratio over 6; markedly up from the 16.3 per cent in the September 2020 period and the 21.5 per cent in the three months to June 2021.

Given the high DTI proportion has been rising in recent years, APRA announced earlier this year a 50 basis point increase to the minimum interest rate buffer used in ADI serviceability assessments, which took effect from 1 November 2021.

It is expected that the new serviceability buffers will help reduce the proportion of high DTI lending from the next quarterly instalment. However, the regulator has previously revealed that it “may vary” the minimum level of the buffer up to 5.0 per cent, if necessary.

According to the property exposures data, the banking industry resilience “remained strong” in the September 2021 quarter despite lockdowns across NSW and Victoria, with banks seeing a 73 per cent increase in profitability than in the same period in 2020.

The data shows that ADI net profit after tax for the year ended September 2021 was $36.4 billion, up from $21.0 billion the year prior.

APRA suggested this was partly down to banks releasing provisions raised during the earlier stages of the pandemic, the fact that ADIs held strong capital and liquidity positions, and non-performing loans remained broadly stable.