Banks to Reduce the Max Amount You Can Borrow
Several of Australia’s biggest banks have tightened their mortgage criteria, which implies you may not be able to borrow as much money from them. What impact will this have on your next purchase?
For instance, ANZ lowered a key lending limit. That means they will no longer lend to borrowers with a debt-to-income (DTI) ratio of more than 7.5 (in other words, individuals can borrow up to seven and a half times their gross annual income).
NAB, on the other hand, has decreased its cap to eight times a borrower’s income.
Both banks had been willing to lend up to nine times the borrower’s income until this month.
In essence, the modifications entail a lowering of the maximum amount that may be borrowed to acquire a home.
Borrowing money from the major four banks will be tighter. The Commonwealth Bank of Australia (CBA) and Westpac have yet to announce any reductions, but they have announced that borrowers with high DTI ratios will be subject to stricter lending standards.
Banks gearing up for a surge in interest rates
The heightened focus on lending caps comes as banks and the Australian Prudential Regulation Authority (APRA), Australia’s financial regulatory body, gear up for a surge in interest rates (many economists believe another rate increase is likely in June).
APRA announced late last year that new borrowers will need to be tested to see whether they are able to withstand loan repayments of at least 3% above current levels (up from 2.5 percent previously).
Furthermore, APRA Chair Wayne Byers recently said that the body was concerned about the surge in high DTI loans produced by some banks.
During the AFR Banking Summit in Sydney, Mr. Byers said, “We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year”.
“Interestingly, this growth has not been an industry-wide development, but rather has been concentrated in just a few banks,” he added.
How to calculate your Debt-to-Income ratio
To determine your debt-to-income ratio, sum up all of your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is the money you’ve made before taxes and other deductions have been subtracted.
Simply put: total debt / gross income = debt-to-income ratio.
If you have a $160,000 gross household income and are seeking for a $700,000 home loan (without any other debt), your DTI is 4.375; this is a ratio that most lenders would be comfortable with.
However, a family in the same financial circumstance who wants to borrow $1.4 million for a house would have an 8.75 DTI, which exceeds the caps now being imposed by ANZ and NAB.
What’s the safe amount to borrow?
You must carefully examine the thin line between maximizing your investment possibilities and going beyond your means, particularly with interest rates on the rise.
That is where we come in.
It’s critical to stress-test what you can borrow in the present financial environment, as well as any potential headwinds that might impact borrowers – such as various possible interest rate hikes.
So, if you’d like to learn more about your borrowing limit and alternatives, don’t hesitate to reach out the team here at Will Bell Mortgage Broker. We’d be delighted to discuss with you how we might help you create a strategy.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.