In a significant move to address growing concerns in the property sector, Australia's banking regulator has announced new restrictions on high-risk mortgage lending. The Australian Prudential Regulation Authority (APRA) will implement a cap on the proportion of new home loans with elevated debt-to-income ratios from February 1.
New Lending Restrictions Explained
The key measure requires that no more than 20% of new mortgages issued by each bank can exceed a debt-to-income ratio of six. This means at least four out of every five new loans must go to borrowers whose total debt amounts to less than six times their annual income.
APRA chair John Lonsdale emphasised that high household indebtedness represents one of the fundamental structural risks to financial system stability. He noted that rising debt levels have historically correlated with increased risky lending practices and rapid property price growth.
Addressing Housing Market Vulnerabilities
The regulatory intervention comes as Australian property prices continue their upward trajectory, placing pressure on borrowers to take on larger debts. This has left numerous households exposed to potential financial shocks from interest rate increases or reductions in income.
Treasurer Jim Chalmers has expressed strong support for the measures, stating they will enhance both financial resilience and housing accessibility for Australians. 'These are important changes that will help with financial resilience and housing affordability,' Dr Chalmers commented. 'It's about managing emerging risks in our financial system and will help people into the market.'
Political Reactions and Future Measures
However, the caps have faced criticism from Greens Senator Barbara Pocock, who argues they don't go far enough. She has called for stricter limitations on investor lending, highlighting that $40 billion has been allocated to property investors in just the last three months.
Senator Pocock urged APRA to employ all available regulatory tools to restrain investor lending, which she claims is worsening the housing affordability crisis.
The new caps will be applied separately to investor loans and owner-occupier mortgages. APRA data indicates the restrictions are unlikely to affect most banks immediately, as only 10% of investor loans and 4% of owner-occupier mortgages currently exceed the six-times-income threshold.
Despite the limited immediate impact, APRA intends these measures to serve as protective guardrails should high-risk lending practices continue to expand. This marks the first time Australia's banking regulator has imposed limits on the volume of high-debt home loans, bringing the country in line with approaches already established in the United Kingdom, Canada and New Zealand.
The regulator has warned that additional restrictions, including investor-specific limits, could be introduced if lending standards deteriorate further or macro-financial risks substantially increase.
