Close on the heels of the interest rate hike announced by the RBA in May, two of the top four banks – ANZ and NAB – have firmed up plans to cut back on risky home loans by lowering the debt-to-income (DTI) ratios.
Presently, housing loans constitute just over 60 percent of Australia’s banking sector’s total loan portfolio. Given the significance of mortgage lending in maintaining the stability of Australia’s banking system, this article will bring you up to speed on the debt-to-income (DTI) -related developments in the big league.
Understand Debt-to-Income (DTI) Ratio
Debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes towards repaying your monthly debt. Your lenders use the DTI ratio to assess your borrowing capacity.
In simple words, a DTI ratio is a personal finance measure used by lenders, including mortgage providers and other financial institutions, to measure if you qualify for credit based on your ability to make timely repayments.
Calculate your DTI ratio in the following simple steps:
- Add your total debt balances.
- Divide the amount by your gross annual income (your salary or total annualized income each year before tax and other deductions are removed).
For instance, say a couple has a home loan of $500,000, a credit card bill of $3,000, and a personal loan of $13,000. The couple earns $90,000 each annually. This takes their total liabilities to $516,000 and their total gross income to $180,000.
Therefore, their DTI ratio would be 2.87 ($516,000 divided by $180,000). Most lenders would be ready to offer the couple a home loan at this ratio. Conversely, if the same couple were looking for a loan amount of $1.5 million to buy a new home, their DTI would rise to 8.33, indicating a high-risk loan.
ANZ and NAB Lower Respective Debt-to-Income Limits
ANZ confirmed that moving ahead from June 6, and it will only offer home loans when the borrower’s debt-to-income (DTI) ratio is lower than 7.5. The new limit is significantly lower than the earlier cap of 9 times the borrower’s income.
According to bank sources, these changes are based on the banking regulator APRA’s apprehensions about the growing number of loans with a DTI ratio of more than 6. It considers this figure unsafe from a lender’s point of view.
Although, as per ANZ sources, nearly a fourth of new loans in the second half of last year had a DTI of 6 or above. Very few came close to 9 times income, the prevailing upper limit then.
A few days before ANZ, another big player, NAB, announced that it was lowering its debt-to-income (DTI) ratio to 8 times income, a step-down from the earlier limit of 9. NAB sources attributed this move to a commitment to responsible lending and fostering timely and well-managed repayments by customers.
These moves by the lending majors reduce your maximum cap on borrowing or refinancing.
Westpac and CBA on Debt-to-Income
Both Westpac and CBA have not infused any new changes to their policies on high debt-to-income (DTI) ratio loans. If you have a DTI of 7 or more, Westpac’s credit team will manually assess your application.
On the other hand, if your loan has a DTI of 6 or higher, CBA will implement tighter lending parameters,
Vigilance Aimed at Protecting Borrowers
At the banking summit, Wayne Byres, chairman of the Australian Prudential Regulation Authority (APRA), explained that the regulator was concerned about high DTI loans being issued by some banks. He added that the APRA would be observing the experiences of this cohort of borrowers.
Mr Byres explained that APRA’s vigilance was based on concerns for residential home loan borrowers who leveraged the meager fixed rates over the past couple of years and may now feel the heat with the rise in interest rates.
In the fast-changing environment, higher inflation and interest rates could significantly affect many mortgage borrowers if interest rates rise quickly and property prices drop.
Overall, APRA expects to witness a decline in housing prices. It presents a positive development from a stability perspective while reducing the borrowers’ need to take loans that are very high multiples of their salaries/incomes.
Variable Interest Home Loans by the Big Banks
Graeme John, Head Of Growth at Joust, said:
“These developments should be reviewed with a holistic perspective. Despite lowering the DTI limits, banks still appear keen to secure the business of borrowers finding it difficult to meet the new, stricter norms. Many banks are strategically reducing their variable loan interest rates to benefit new customers. This is a big positive for those looking to apply for a home loan.”
ANZ has reduced its lowest variable rate to 2.29 percent, and CBA’s starting variable rate is 2.14 percent. The cutbacks in variable interest home loans indicate that the big banks are all vying to become the leading players in the home loans space for all practical reasons.
On the other hand, Westpac offers customers a unique two-year honeymoon rate of 2.09 percent. Home buyers opting for variable loans may have to incur higher repayments. Still, they can scout for exemptions and offers by financial institutions eager to grow their home loan business.
Implications of Interest Rate Hikes by RBA
According to most industry analysts, RBA will continue to increase the interest rates by as much as 2 percentage points over the next year. Though interest rate hikes will most likely lead to a drop in house prices, they also tend to lower the amount of money you can borrow.
In general, if the interest rates rise - as predicted - by 2 percent, the borrowing capacity of homebuyers could reduce by almost 18 percent. This means that your property price will have to decline by more than this amount to leave you faring well.
Industry experts predict significant price drops in housing, between 5 - 15 percent. However, these drops may not be substantial enough to make up for the lower borrowing capacity.
Navigate the Challenges of Securing a Home Loan with Joust
The interest rate hike and lowering of the debt-to-ratio (DTI) limit can make home-loan hunting an overwhelming task. If you plan to apply for a home loan now, consider weighing the pros and cons of how much you want to borrow.
Navigate the challenges of finding a suitable home loan with Joust. We are one of Australia’s most reliable and user-friendly online marketplaces for home loans. You can access up to 80 percent of Australia’s home loan finance providers on our platform.
Avoid negative equity situations where you owe your lender more than your property’s worth. If you have recently taken on a home loan with a relatively small deposit, you could be at greater risk if the property prices fall in the present scenario.
Even if you pass the banks’ serviceability and other assessments, be sure you know the loan’s overall costs and terms and conditions. We offer innovative tools such as the Instant Match for a quicker way to better home loans. It instantly matches your profile with our reputed partner’s top three home loan products.
Also, if you are planning to apply for a loan, invest in basic background research.
Work out how your monthly repayment budgets would appear if the rates increased by 2 percentage points. Also, consider the amount of debt you’re considering. Our Mortgage Calculators are free-to-use tools and facilitate instant calculating of your borrowing capacity.
You could also try out Joust’s Live Auction platform. It is a great way to connect with banks and reputed lenders as they compete for your loan with attractive bids. Our platform is highly secure, and most importantly, you are under no obligation to proceed.