APRA: Risky debt still on the rise

17 MAR 2022 By Noemi Pamintuan-jara 12 min read Finance

Nearly one in every four new mortgages is risky, according to the Australian Prudential Regulation Authority (APRA).

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APRA’s authorised deposit-taking institution (ADI) property exposure report for the December 2021 quarter has revealed that 24.4 per cent of new mortgages had a debt-to-income ratio of six times or more – an increase from the previous quarter’s 23.8 per cent and last year’s 17.3 per cent.

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As a point of reference, APRA considers debt-to-income ratios of six or above to be of concern.

This coincides with new data released by the Australian Bureau of Statistics (ABS) showing that residential property prices saw a 23.7 per cent jump from figures in 2021, the highest annual increase on record. 

Furthermore, the APRA report comes off the back of CoreLogic’s latest data stating that house price growth will begin to slow in 2022.

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RateCity research director Sally Tindall said: “It’s no surprise risky lending rose at the same time property prices skyrocketed. [It’s] the price many Australians had to pay to get into an overheated property market.”

To help mitigate the further increase of debt-to-income ratios, APRA has already upped the rate at which banks stress test mortgages from 2.5 per cent to 3 per cent on 1 November 2021.

APRA’s updated serviceability test took effect some time in the December quarter, but for customers who were pre-approved but had not yet purchased a home by 1 November, they were still evaluated using the previous serviceability buffer.

Looking ahead, Ms Tindall has projected that “with property prices already starting to cool, and the RBA poised to hike interest rates, APRA is unlikely to implement any further measures”.

“In fact, after a series of RBA interest rate hikes, we could see APRA reduce its serviceability buffer back down to 2.5 per cent,” she added.

Ms Tindall was of the opinion that most Australians who have home loans are capable of dealing with the anticipated interest rate increases.

“Mortgage holders have a whopping $231.68 billion in offset accounts, which will offer many a decent buffer when rates rise,” she explained.

Based on RateCity’s analysis of data, to avoid taking on a risky loan, a household annual income of $188,331 is required to buy a median-priced house in Sydney and $133,336 in Melbourne.

Annual income required to have debt-to-income ratio of less than 6x

Capital City

Median house price (Feb 2022)

Loan size 

(assumes 20 per cent deposit)

Annual income required to have debt to income less than 6x

Sydney

$1,410,128

$1,128,102

$188,331

Melbourne

$998,356

$798,685

$133,336

Brisbane

$828,175

$662,540

$110,608

Adelaide

$648,418

$518,734

$86,600

Perth

$559,837

$447,870

$74,770

Hobart

$781,069

$624,855

$104,316

Darwin

$569,928

$455,942

$76,117

Canberra

$1,031,410

$825,128

$137,751

Source: RateCity.com.au, CoreLogic. Median house prices are from CoreLogic Feb 2022, released 1 March 2022. Debt-to-income ratio of 5.99 is assumed. LMI costs not included.

To avoid getting trapped in risky debt, here are RateCity’s tips when taking out a new loan:

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