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Lenders tighten lending ratios

lending ratiosSome of Australia’s biggest banks have tightened their lending ratios recently, by reducing the maximum amount they’ll lend to homeowners. But before you start worrying you’ll never be able to buy a home, let’s take a closer look to see whether this will actually impact you and your next purchase…

You may have seen in the news over the last month that lenders have lowered the maximum debt-to-income (DTI) ratio. This ratio is a measure of how much debt a household is taking on, as a proportion of their overall gross income.

Whilst its true there has been some changes to this ratio with specific lenders, it has not been an industry-wide change, as many reports would have you believe.

The changes mean that the maximum loan amount some borrowers could achieve with specific lenders has reduced.

However, many clients we speak to are looking to borrow just enough to secure the type of home they’re after (and not anywhere near the max debt-to-income ratio).

 

Why are banks tightening lending anyway?

The Australian Prudential Regulation Authority (APRA) started making some regulatory changes late last year, when they increased the servicing rate lenders must use to qualify borrowers for new lending.

Essentially the change means that to qualify for a new loan now, you need to show you can cover loan repayments at 3% higher than the current interest rate. (The servicing buffer was increased from 2.5% to 3% in Nov 21 – you can read more about this here.)

Given economists are predicting further rate increases, APRA has continued to keep a close eye on the volume of loans with high DTI ratios. APRA wants to ensure that if rates do continue to increase, there won’t be a whole lot of homeowners defaulting on their mortgages.

APRA Chair, Wayne Byres addressed the Financial Review Banking Summit on May 31, stating, “Interestingly, the growth (in high DTI loans) has not been an industry-wide development, but rather has been concentrated in just a few banks.”

Accordingly, rather than enforcing industry-wide changes to the max DTI ratio, APRA are now working with the specific banks identified.

 

So how much can *you* afford to borrow?

There’s a fine line between maximising your purchasing opportunities and stretching yourself beyond your limits – especially when interest rates are on the rise.

If you would like to explore your borrowing capacity, we can help.

Just reach out to us here.  Alternatively, you can give our team a call on 02 6286 6501.

 

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