Banks are tightening their lending standards, limiting the amount you can borrow.

Some of Australia's largest banks have tightened their mortgage lending requirements, limiting the amount you can borrow. What impact might this have on your next purchase?

ANZ said this week that it will no longer lend to clients with a debt-to-income (DTI) ratio of more than 7.5 percent (meaning people can borrow up to seven and a half times their gross annual income).

Meanwhile, NAB has lowered its limit to eight times a borrower’s income.

Both banks had been willing to lend up to nine times a borrower’s salary until last month.

The changes basically reduce the maximum amount you can borrow from them to purchase a home.

CBA and Westpac, two other big four banks, haven’t disclosed any reductions, but have stated they’re already tightening lending rules for clients with high DTI ratios.

 

Why are banks restricting lending?

Financial institutions and the industry regulator, the Australian Prudential Regulation Authority (APRA), are focusing more on lending caps as they brace for the effect of higher interest rates (many economists are tipping another rate hike in June).

APRA began moving late last year when it stated that new borrowers would be evaluated to see if they could handle interest rates at least 3% higher than the present rate (up from 2.5 percent previously).

Then, earlier this week, APRA Chair Wayne Byers expressed worry about the surge in high DTI loans provided by several banks.

“We’ll also be paying particular attention to the experiences of borrowers who borrowed at high multiples of their income – a group that has increased significantly in the last year,” he said at the AFR Banking Summit in Sydney.

“Intriguingly, this increase has been focused in only a few banks rather than being an industry-wide trend.”

 

What are DTI ratios and how do they work?

Calculating your DTI ratio is a breeze.

The formula is: total debt / gross income = debt-to-income ratio.

So, if you’re looking for a $700,000 home loan (and have no other debt), and your gross family income is $160,000, your DTI is 4.375, which most lenders would consider acceptable.

However, a family in the same financial situation looking to borrow $1.4 million for a property would have a DTI of 8.75, which is higher than the current ANZ and NAB limits.

So, how much money can you safely borrow?

With interest rates on the increase, there’s a tight line to walk between maximizing your investment prospects and pushing yourself too far.

That’s where we can help.

It’s crucial to stress-test what you can borrow not only in the current financial climate, but also against any potential future headwinds, such as numerous interest rate hikes.

So, if you’re interested in learning more about your borrowing capacity and options, contact us immediately. We’d be delighted to sit down with you and assist you in developing a strategy.

To learn more, contact Premium Finance Group Australia at (07) 4720 8888 or email us at finance@pfga.com.au

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