By Louisa Sanghera, Director, Zippy Financial
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.
