Number of 'unaffordable' home loans spikes 42%

author-avatar By on September 08, 2020
Number of 'unaffordable' home loans spikes 42%

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Data from the prudential regulator released today reveals the number of unaffordable home loans being taken out has increased by 42% from June 2019 to June 2020.

Australian Prudential Regulation Authority (APRA) data shows the number of residential mortgages with debt to income ratios above six has increased by a whopping 42% to $17.5 billion in the June 2020 quarter.

A debt to income ratio (DTI) is one way the banks measure the ability of a borrower to comfortably repay their mortgage.

While there's no cap on DTI ratios, a DTI six times higher than a borrower's income is considered 'high risk' by many lenders.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner-occupiers.

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

Additionally, the data revealed that the value of 95% loan-to-value-ratio (LVR) loans has soared by 60% from June 2019 to June 2020 to the value of $1.8 billion.

The higher LVR lending could be buoyed by the Federal Government's First Home Loan Deposit Scheme, which allows first home buyers to enter the property market with a deposit as low as 5%. 

According to the scheme's administrator the National Housing Finance and Investment Corporation (NHFIC), roughly 12.5% of all homes purchased by first home buyers during the peak of the COVID-19 crisis were done so using the scheme. 

The report by the NHFIC found that the scheme has allowed first home buyers to shave an average of four years off the time it normally takes to save for a house deposit. 

Meanwhile, interest-only home loans jumped 13.1% in the June 2020 quarter to the value of $20.0 billion, while the number of owner-occupied loans increased by 31.1% and investor loans were up by 24.1%.

"Despite ongoing challenges to profitability, bank financial positions remain sound due to strong capital and liquidity levels, support through various policy measures and signs of reduced risk appetite in residential mortgage lending," the APRA report said.

"There is some degradation of asset quality as a result of COVID-19, although the full scale of this impact will only be seen in the coming quarters."


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Emma Duffy joined Savings.com.au as a Finance Journalist in 2019 after spending a year as the editor of The Real Estate Conversation. She's passionate about empowering people to make smart financial decisions and improve the financial literacy of Australians by translating complex finance topics into understandable, relatable content.

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