ANZ and NAB tighten debt-to-income lending rules amid fears interest rates will keep rising


Two of Australia’s big four banks are tightening home lending rules amid expectations interest rates will keep rising over the coming year.

The worst inflation in two decades means the Reserve Bank of Australia will keep tightening monetary policy – dramatically adding to monthly mortgage repayments as borrowers keep paying more for everyday goods.

ANZ and NAB have now both imposed stricter debt-to-income ratios on new borrowers while the Commonwealth Bank and Westpac are monitoring potential overborrowing.

That means most home buyers will not be able to borrow as much money on their mortgage, limiting the price of the home they can buy.

Two of Australia’s big four banks are tightening home lending rules amid expectations interest rates will keep rising over the coming year (pictured is a Melbourne auction)

Lending policies of the major banks

ANZ: Debt-to-income threshold of 7.5, down from 9

NAB: Debt-to-income threshold of 8, down from 9

WESTPAC: Manual credit assessment on a loan with a debt-to-income ratio of 7 but it still has a threshold of 9

COMMONWEALTH: Stricter rules on credit cards if a borrower has debt-to-income ratio of 6 but it still has a threshold of 9

AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY: The banking regulator considers a debt-to-income ratio of 6 or more to be risky. That is based on a loan amount divided by a borrower’s salary before tax – or in the case of a couple, their combined income

Source: RateCity 

Almost a quarter of Australian home borrowers are in the dangerous debt category where they owe their bank at least six times their salary, before tax.

But two of Australia’s big four banks – Commonwealth Bank and Wespac – still offer debt-to-income ratios of nine as ANZ and NAB retreat from that lending threshold. 

RateCity research director Sally Tindall said the new debt-to-income ratio restrictions would have the potential to limit how much someone could borrow as interest rates rose.

‘Taking on a large debt compared to your income is risky at the best of times,’ she told Daily Mail Australia.

‘In the face of rising rates and falling property prices it can be fraught with danger.

‘If you’re in the market for a new loan, don’t just rely on the bank to tell you how much you can borrow. 

‘Think long and hard about how much debt you’re prepared to take on and check you’ll be able to make the monthly repayments.’

The era of a record-low 0.1 per cent cash rate last year made property prices surge by 22 per cent as the big banks offered fixed mortgage rates of just 2 per cent.

This was the fastest annual pace since 1989, CoreLogic data showed. 

With the median national property price now at $748,635, as of April, an Australian on an average, full-time salary of $90,917, before tax, would have a debt-to-income ratio of 6.6 – with a 20 per cent mortgage deposit factored in.

National Australia Bank on Friday told mortgage brokers it would be reducing the debt-to-income ratio threshold to eight from nine (pictured is a Melbourne bank branch)

National Australia Bank on Friday told mortgage brokers it would be reducing the debt-to-income ratio threshold to eight from nine (pictured is a Melbourne bank branch)

So this average-income borrower paying off a typical $598,908 mortgage would have debt-to-income ratio of six – a level which the Australian Prudential Regulation Authority considers to be risky.

A median-income earner on $62,868, paying off this same mortgage, would have a dangerous debt-to-income ratio of 9.5, where any mortgage rate increase would stop them from being able to pay their bills.

National Australia Bank on Friday told mortgage brokers it would reduce the debt-to-income ratio threshold to eight from nine.

ANZ from Monday will reduce the debt-to-income ratio limit to 7.5 from 9.

The Commonwealth Bank, Australia’s biggest home lender, applies stricter credit card limits on borrowers with a debt-to-income ratio of six or more, but it still has a threshold of nine.

RateCity research director Sally Tindall said the new debt-to-income ratio restrictions would have the potential to limit how much someone could borrow as interest rates rose

RateCity research director Sally Tindall said the new debt-to-income ratio restrictions would have the potential to limit how much someone could borrow as interest rates rose

Westpac, Australia’s second biggest bank, refers any loan with a debt-to-income ratio of seven or more to its credit team for a ‘manual assessment’ but it still has an upper limit of nine.

‘We also assess borrowers at a higher interest rate than their initial rate to ensure they can meet future changes in interest rates,’ the bank said.

Almost a quarter of borrowers have a debt-to-income ratio of six or more.

APRA data from the December quarter showed 24.4 per cent of new mortgages had a debt-to-income ratio of six or more, compared with 23.8 per cent in a December quarter.

At the end of December 2020, just 17.3 per cent of borrowers were in this category shortly after the RBA cut the cash rate to a record-low of 0.1 per cent.

In May, the RBA raised rates for the first time since November 2010, with the quarter of a percentage point increase taking the cash rate to 0.35 per cent.

The RBA raised rates during an election campaign after the Australian Bureau of Statistics revealed headline inflation in the year to March had surged by 5.1 per cent – the fastest annual pace since mid-2001 following the introduction of the GST. 

Westpac is expecting the Reserve Bank is raise rates seven more times by May 2023, starting with a bigger-than-usual 0.4 percentage point increase in June.

ANZ has now reduced the debt-to-income ratio limit to 7.5 (pictured is a Sydney bank branch)

ANZ has now reduced the debt-to-income ratio limit to 7.5 (pictured is a Sydney bank branch)

This would move the RBA cash rate to 2.25 per cent for the first time in eight years.

A borrower paying off a $600,000 mortgage would suffer a $713 increase in their monthly repayments, compared with May 2022 before the rate rise. 

They would owe $3,019 a month, up from $2,306 just a month ago. 

The RBA in April forecast a rise in the cash rate to 2 per cent would cause a 15 per cent plunge in property prices.

Westpac said that was more likely to affect Sydney and Melbourne but not the smaller capital cities. 

A Commonwealth Bank survey of its borrowers showed 90 per cent of them were expecting interest rates to rise, almost half or 47 per cent reducing their living costs, 42 per cent boosting their savings, and 38 per cent making additional loan repayments. 

APRA has since November required the banks to assess if a borrower could cope with a three percentage point increase in their mortgage rate, compared with 2.5 percentage points previously.

How YOUR mortgage repayments could surge under a 2.25 per cent cash rate

$500,000: Monthly repayments rising by $594 from $1,922 to $2,516

$600,000: Monthly repayments rising by $713 from $2,306 to $3,019

$700,000: Monthly repayments rising by $831 from $2,691 to $3,522

$800,000: Monthly repayments rising by $951 from $3,075 to $4,026

$900,000: Monthly repayments rising by $1,070 from $3,459 to $4,529

$1,000,000: Monthly repayments rising by $1,189 from $3,843 to $5,032

Calculations based on variable mortgage rates rising from 2.29 to 4.44 per cent in line with the cash rate increasing by 2.15 percentage points from a record-low of 0.1 per cent to 2.25 per cent

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