Subprime debt drops slightly as tougher APRA rules on home loans bite

The value of new mortgages with risky debt levels fell slightly, according to new data released by APRA.

APRA’s quarterly ADI Property Exposure report for the March 2022 quarter shows that 23.1% of new mortgages had a debt-to-income ratio of six times or more, in dollar terms.

This is down from the record high of 24.3% reached in the previous quarter, but still significantly higher than a year ago.

Debt to income ratios of six and above are considered risky by APRA.

In November 2021, in response to rising debt levels, APRA increased the rate at which banks test mortgages from 2.5% to 3%. This means that anyone applying for a mortgage today must show the bank that they can afford the repayments even though their interest rate has gone up 3%.

This is the first full quarter of data where banks have tested new home loan applications at 3%.

The value of subprime loans is expected to decline further in the coming quarters as rising interest rates reduce the maximum amount people can borrow from the bank.

Proportion of new mortgages with a debt-to-income ratio of six times or more

Quarter March 2022 Last quarter (December 2021) 1 year ago (March 2021)
Debt with income of 6 times or more



(-1.2% points)


(+4.2% point)

Source: APRA Quarterly ADI Property Exposures for March 2022, new lending, ADI’s, published June 14, 2022.

Compensating balances reach a new high of $228 billion

The total amount of all residential clearing accounts increased to $228.05 billion in the March quarter, up $5.10 billion from the previous quarter and $28.28 billion more than a year ago.

This total could drop in the coming quarters if the RBA continues to raise official rates and people start to dip into their savings to meet their growing monthly repayments.

Clearing Account Balances – Open Loans

Quarter March 2022 Change from previous quarter Change
1 year ago

$228.05 billion

record high

$5.10 billion

$28.28 billion

Source: APRA Quarterly ADI Property Exposures for March 2022, outstanding ADI loans, published June 14, 2022.

APRA’s March quarterly report on exposure to ADI assets – other key statistics:

  • New loans to investors, as a share of all new loans, increased 2.3% year-on-year (March 2021 quarter) to 30.9%.
  • New interest-only loans, as a proportion of all new loans, fell 0.3% from a year earlier to 19.2%.
  • Loans with a loan-to-value ratio of 90% or greater decreased by 3.1 percentage points to 7.3% of all new loans. Research Director Sally Tindall said: “These new data show that APRA’s stricter service test is starting to have an impact on the ground.

“While nobody likes being told ‘no’ from their bank, preventing people from taking on risky levels of debt is a good thing,” she said.

“We expect debt-intensive loans to continue to decline throughout the year as rising interest rates curb people’s ability to borrow.

“The more the rates increase, the less some people will be able to borrow from the bank. This should see fewer households taking on debt grossly disproportionate to their income.

“Research from shows that a single person earning $100,000 today could see their maximum borrowing capacity drop by almost $130,000 in less than a year if the cash rate hits 2 .35%, as expected by Westpac and NAB.

“APRA introduced the 3% stress test at a time when rates were at record highs and debt-to-income ratios were at near record highs. Once the cash rate returns to a more normal level, we could see APRA bring that stress test down to 2.5%.

“It’s great to see some Aussies were still pouring money into their clearing accounts before the cash rate hikes, ready for a rainy day.

“While many people have record levels of cash on hand in their clearing accounts, not everyone is lucky enough to be in this position.

“Some people are already struggling to cope with the skyrocketing cost of living, without a decent buffer to fall back on,” she said.

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