2022 APRA changes? DTI tightening

Fresh off the press.

Has any brokers seen this come through? And if so, how big of an impact will this be.


AFR Article - APRA alert for loan repayment shock

APRA alert for loan repayment shock

The prudential regulator says it has targeted some banks for lending to home loan customers that carry too much debt.

In an address to The Australian Financial Review Banking Summit, APRA chairman Wayne Byres said the economy is entering “a very different environment than has existed for much of the past decade”.


AFR editor in chief Michael Stutchbury with Wayne Byres, APRA chair, at the AFR Banking Summit on Tuesday morning. Louie Douvis

“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,” he said.

The Australian Prudential Regulation Authority is monitoring the impact of a “sizeable repayment shock, possibly compounded by negative equity” when fixed rate borrowers roll-off to higher variable loans, he said, while it has recently targeted lenders for allowing customers to borrow at high multiples of their income.

He said the growth of high debt-to-income (DTI) borrowing had not been an industry-wide development but concentrated in just a few banks.

The Sydney Morning Herald reported this week that National Australia Bank had this month cut its debt-to-income ratio limit from nine times to eight times, while ANZ Bank said it will no longer accept loan applications from borrowers with total debts more than 7.5 times their income, down from nine times.

Overall, APRA’s chairman said the banks were well-placed to weather a more difficult environment “and we do not expect a deterioration in housing loan portfolios to cause system stability issues”.

Moreover, an expected decline in housing prices is, on balance, “a positive development from a system stability perspective, reducing the need for borrowers to borrow very high multiples of their incomes”.


Nevertheless, prudence is required – and APRA no longer sees housing loan portfolios as low risk.

“Aggregate dollar losses from housing portfolios now regularly exceed that from other portfolios in our stress tests,” he told the Summit in Sydney. “Of course, that can simply be a product of the calibration of the stress test itself, but more intuitively it reflects the combination of a growing proportion of housing loans in the total book, and rising risks within those portfolios from a larger share of more heavily indebted borrowers.”

Carbon challenges
On climate, another major area of focus at the banks, Mr Byres said the self-assessment of governance of climate risk conducted by the 21 largest banks had been broadly positive. “They showed that almost all boards had accepted their responsibility for actively overseeing climate-related risk,” he said.

However, APRA found only half of the banks surveyed are currently assessing emissions from their lending exposures. Mr Byres acknowledged data around emissions made this difficult – but not doing so created two challenges.

“First, it makes it difficult for banks to properly understand how borrowers will (or will not) be impacted by the transition to a lower-carbon world,” he said. “And second, it makes it difficult for banks to satisfy the increasing demands from investors, standard-setters and peer regulators for greater climate risk disclosure.”

Overall, Mr Byres said Australia’s banks are well-capitalised, in both historic and international terms, and have a stronger funding profile than in previous years, while remaining highly rated with good access to international funding markets.

 

This isn't really an APRA change, its already built into serviceability models. I.e. this sorts itself out with higher interest rates.
DTI's of 8+ rely on 2.5% interest rates and 2.5% assessment buffers.
As rates go to 3.5% and a 3% assessment buffer, DTIs maxed out fall to around 6.
I.e. you cannot pass servicing with DTI's above 7.5 in higher interest rate settings (which are all but a few weeks away now).

They targeted this area of lending late last year by increasing the buffer to 3%.
IMO if interest rates ratchet up, they'll need to bring this back down to 2-2.5% given the impact of higher interest rates to borrowing capacities...and the unlikeness of a cash rate at 5%+ (when the cash rate is 2%, its assessed at 5% under current serviceability calculations).

 

Yes some lenders have already begun reducing their DTI limits

 

And yes it’s these loans that should be at most risk.
Ie loans approved with DTIs of 7.5+ over the last couple of years.
Without improvements to their position, they will have less buffers to absorb higher interest rates.

 

Ugh. I'll just accept that I'll won't be able to refinance....ever. Well maybe in 25 years when the loans are paid off haha.

 

This really isn't a thing.

There are more metrics to borrowing calculations than DTI. Most people fail the cash flow metrics at a DTI of around 7. DTIs higher than 8 are already rare and as rates increase the cash flow metric becomes even more important. A few more rate increases and most people will fail servicing when their DTI is still under 7.

On some level, I think releases like this are just posturing from APRA to make them feel self important.

 

I am seeing issues with a DTI at 2.5 due to serviceability. This may read like an ABC headline, but I am almost certain there will be drastic changes made to HECS-HELP loans and repayments within this decade… seeing as now we’re approaching the point that it impacts on deposit saving and repayment servicing. It’s already having an impact on the current generation of FHBs and we’re also seeing measures like debt write-offs occur in the U.S. for student loans.

 

Interesting had a Melb re agent contact me today. House got passed in at auction, said buyers can not source finance. Is this the new norm?

Agents are now phoning me, times are a changing

 

No, it is just normal. RE agents were doing it to me last year, and for 30 years before that.

 

Not in boom times, they dont need to

 

Must have a lot of consumer debt if they can’t service a loan with a dti of under 3

 

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**** going to get real and he bailed. Hah!

Wonder if the next guy will go hard and blame the predecessor or further ease at next sign of hardship by asking banks to bail out bad borrowers

 

I'm hoping that the government investigates APRA just like they are doing with the RBA

 

Why ?

 

Because they were asleep at the wheel just like the RBA was.
Also as per the article, seems like there was some political pressure on them to remove responsible lending so that should be looked at too to make sure their decisions are not politically motivated/influenced