Home buyers pay off credit cards to borrow more for housing, but rarely take out large debts compared to incomes

Home buyers are paying off credit cards and personal loans to be able to borrow more for housing as property prices rise.

But industry experts say very large mortgages compared to borrowers’ incomes – which could soon be the subject of a lending crackdown – are not widespread at this stage, with potential buyers more likely to face challenges keeping their deposit in line with rising house prices or planning for a rainy day.

Treasurer Josh Frydenberg gave regulators the green light to clamp down on high-debt-to-income-ratio loans on Tuesday. The share of new residential mortgages where debt is at least six times income rose to almost 22 per cent in the June quarter, from 16 per cent a year earlier, on figures from bank regulator the Australian Prudential Regulation Authority. The measure includes non-mortgage debt such as credit cards.

Mortgage brokers said it was unusual for borrowers to take on very large debts compared to their incomes, as many banks would not lend more than six to seven times earnings.

“There are only a few lenders that would entertain going above six to seven times,” Shore Financial chief executive Theo Chambers said. “It’s possible, but it’s definitely hard.

“People are pushing the envelope as much as they possibly can in terms of growing their maximum. Most people are chopping up credit cards, paying out personal loans, doing everything they possibly can to meet the guidelines.”

He said banks were already mindful of not lending too much, especially since the financial services royal commission, and suggested a bigger risk was home buyers borrowing as much as possible and assuming property prices would rise or interest rates would not.

With house prices rising, some borrowers have been trying to maximise their borrowing capacity, either to buy in a specific area or to add an investment property to their portfolio, Loan Market’s Daniel Koutzamanis said.

“It’s not all clients; it wouldn’t be a majority of clients,” he said.

“If you are a client who is in that category, you need to be a very, very strong applicant to be able to borrow.

“[With a] steady job, you’ve been in your job for a long time, if you’re in a family situation, if both husband and wife are working and you’ve got dual incomes coming in … with minimal debts like personal loans, credit cards and AfterPay.”

A lot of lenders are already reviewing debt to income ratios of applicants, Mortgage Choice Blaxland, Penrith and Glenmore Park principal Rob Lees said.

Although buyers are borrowing more as prices rise, banks won’t approve a loan application that qualifies in terms of income and expenses but has a high debt to income ratio, he said.

On the flip side, he noted a Bank of Queensland offer for a low variable rate for borrowers with a debt to income ratio below six times.

“If people don’t qualify, we’ve got to bring them down to a more realistic expectation,” he said. “I can’t remember specifically someone recently [with] the debt-to-income being over.

“Often … we’re suggesting [applicants] cancel credit cards, that’s very common. There are very few applications that go through without people reducing credit card limits.

“In some cases, they’ve got savings and still got HECS … some banks will include that in the debt-to-income, and some won’t.”

Andine Mortgage Brokers’ Andrew Kostanski said his clients were well aware of how much they could afford to spend on a mortgage based on how much they were spending on rent, for example.

“I’ve never had one person come in saying, ‘I want to have 10 times [debt to income]’,” he said.

“Everybody is realistic; everybody knows what they can afford.”

Instead, some clients such as first-home buyers are compromising by looking at a suburb a little further from the city, he said.

Chris Foster-Ramsay has rarely seen clients hitting a debt-to-income cap of six times, as they have good borrowing capacity with adequate deposits.

“We are not holding clients back from borrowing money because they’re hitting the caps,” the principal broker at Foster Ramsay Finance said, adding it may be more common in highly geared investors or first-home buyers, which he does not work with as much.

He has already heard of lenders slightly reducing how much buyers can borrow to deal with the strong growth of the housing market.

“We’re not saying to clients, your borrowing capacity is fine, but you can’t borrow that much money because of your debt to income,” he said. “I’m not seeing it.”