Some of Australia’s biggest banks have tightened their mortgage lending criteria, meaning you might not be able to borrow as much from them. How might this affect your next purchase?
ANZ has lowered a key lending cap, indicating it will no longer lend to borrowers with a (DTI) ratio above 7.5 (meaning people can borrow up to seven and a half times their gross annual income). NAB have reduced its cap to eight times a borrower’s income.
Up until June, both banks had been willing to lend up to nine times a borrower’s income.
In effect, the changes mean the maximum amount you can borrow with them to buy a property will be reduced.
CBA and Westpac have said they’re already applying together lending rules to borrowers seeking loans with high DTI ratios.
Why Are Banks Tightening Lending?
The increased focus on lending caps comes as financial institutions and the industry regulator, the Australian Prudential Regulation Authority (APRA), prepare for the impact of higher interest rates.
APRA started making moves as early as late 2021, when it announced new borrowers would need to be tested to see if they could cope with interest rates at least 3% above what was the current rate. Then APRA Chair Wayne Byers indicated the regulator was concerned about the rise in high DTI loans being issued by some banks.
How Do DTI Ratios Work?
A DTI ration is simple to work out. The formula is total debt / gross income = debt-to-income ratio.
For example, if you are seeking a $700,000 home loan (and have no other debt) and you have $160,000 in gross household income, your DTI is 4.375 – a ratio most lenders would be comfortable with. However, a household in the same financial position seeking to borrow $1.4 million for a home would have a DTI of 8.75, which puts it above the caps being imposed by the banks.
How Much Can You Safely Afford to Borrow?
There is a fine line between maximising your investment opportunities and stretching yourself beyond your limits, especially with interest rates rising.
It is not only important to stress-test what you can borrow in the current financial landscape, but also against any upcoming headwinds that are tipped to hit borrowers.
FAQ
A: The banks are tightening lending criteria to prepare for the impact of higher interest rates. Regulatory bodies like the Australian Prudential Regulation Authority (APRA) are also focusing on lending caps to ensure financial stability.
A: ANZ has lowered its lending cap to a Debt-to-Income (DTI) ratio of 7.5, while NAB has reduced its cap to eight times a borrower’s income. Previously, both banks were willing to lend up to nine times a borrower’s income.
A: The DTI ratio is calculated by dividing the total debt by the gross income. For example, if you are seeking a $700,000 home loan and have a gross household income of $160,000, your DTI would be 4.375.
A: The changes mean that the maximum amount you can borrow to buy a property will be reduced. This could affect your purchasing power and investment opportunities.
A: You can consult with financial advisors or mortgage brokers to understand your borrowing capacity. They can help you map out a plan based on your financial situation and the current lending landscape.
A: It’s crucial to stress-test your borrowing capacity not just based on the current financial landscape but also against any upcoming economic changes, especially with interest rates on the rise.
Phone: 1300 855 022
Email: clientservices@zippyfinancial.com.au
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilizes her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Connect with Louisa on Linkedin.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
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