APRA Implements Cap on High DTI Home Loans to Address Housing Market Concerns

Under the new regulation, banks and authorized deposit-taking institutions (ADIs) will be restricted from issuing more than 20% of new home loans to borrowers whose DTI ratios are six times or higher. This cap applies to both owner-occupier and investor loans, with an exemption for new housing developments. Currently, approximately 6% of new loans exceed this DTI threshold, with nearly half falling between four to six times DTI.

APRA Chair John Lonsdale emphasized the proactive nature of this approach, stating that the cap aims to reduce high-risk lending before it poses systemic threats to the financial system. Given the banking sector's substantial exposure to residential mortgages, such measures are deemed necessary to prevent potential housing shocks.

This policy marks APRA's first adjustment to loan regulations since 2017 and aligns with similar actions taken in countries like New Zealand and Canada. The decision follows recent interest rate cuts and government incentives for first-home buyers, which have contributed to record property prices and an 18% surge in investor loans in the last quarter.

Market expectations now lean toward a potential rate hike by the Reserve Bank of Australia, currently holding at 3.6%. The Australian Banking Association has expressed support for the policy, particularly praising the exemption that supports housing supply.

For borrowers, especially those with high DTI ratios, this new cap may necessitate reassessing their borrowing capacity and financial strategies. Prospective homebuyers and investors should consult with financial advisors to understand how these changes might impact their loan eligibility and overall financial plans.