Australia’s financial regulator is moving to rein in risky lending by capping the share of new mortgages that exceed six times a borrower’s income. The changes, coming into effect in February, aim to strengthen the resilience of both banks and households as property prices continue to climb.
Key Takeaways
- APRA will cap new bank loans where debt is 6× a borrower’s income starting 1 February next year.
- Banks may only issue up to 20% of new loans to borrowers above this threshold.
- Applies to investors and owner-occupiers, with two major exemptions.
- Move is designed to pre-emptively reduce financial stability risks as house prices rise.
- Caps are unlikely to bite immediately, as current high-DTI lending is already below 20%.
APRA Moves to Restrict High Debt-to-Income Lending
The Australian Prudential Regulation Authority (APRA) has announced new limits on high loan-to-income (LTI) mortgages amid increasing concern about the risk profile of new lending. From 1 February next year, banks will be restricted in how many loans they can issue to borrowers seeking to borrow six times or more their annual income.
Under the cap, banks will be allowed to write only up to 20% of new loans in this high-gearing category.
APRA chair John Lonsdale said the regulator is acting early to avoid instability building in the financial sector:
“By activating a debt-to-income limit now, APRA aims to pre-emptively contain risks building up from this type of lending and strengthen banking and household sector resilience.”
What Loans Are Exempt From the Cap?
Two types of loans are carved out of the new restrictions to avoid hindering mobility and home supply:
1. Bridging loans
For owner-occupiers temporarily holding two properties.
2. Loans for brand-new homes
Including purchases and construction loans, to support housing supply growth.
Why Is APRA Acting Now?
APRA is concerned about:
- High debt-to-income borrowing, especially among investors
- Strong house price growth across most major markets
- Rising financial system risks if households overextend
Despite these concerns, APRA noted the caps won’t cause major disruption immediately since high-DTI lending is already below the 20% limit for banks.
The regulator will also maintain its existing 3% serviceability buffer, requiring banks to test borrowers’ ability to repay loans at a rate 3% above their actual mortgage rate.
Government Response
Federal Treasurer Jim Chalmers welcomed the move, calling it important for both stability and affordability:
“It’s about managing emerging risks in our financial system and will help people into the market… These rule changes are an important way for the regulator to reduce risk in our economy.”
Final Word
With housing prices rising and lending competition intensifying, APRA is stepping in to place guardrails around risky borrowing. While most borrowers won’t see immediate changes, the cap forms part of a broader effort to strengthen financial resilience and moderate future risks in the property market.
