National Australia Bank will start automatically rejecting customers who want to borrow a high multiple of their income and only pay interest on their home loan, amid concerns over the growing risks created by rising household indebtedness.
From this Saturday, the bank will decline any customer applying for an interest-only loan who has a high loan-to-income ratio – an approach that banking sources said was not used by other lenders in the mortgage market.
NAB would not say what loan-to-income ratio it considered to be "high", but the move signals a further toughening in its stance towards interest-only borrowers, who are already facing higher interest rates, larger deposit requirements and shorter loan terms.
Banks have taken the tougher line on interest-only customers because of regulator fears that a boom in interest-only lending could create risks for the economy if borrowing costs rise from near record lows, or if there is an economic slowdown.
Investment house JCP raised the alarm in May about the risks to banks from a blowout in loan-to-income ratios in Australia's big banks, saying the most highly-geared borrowers often had debts of more than six times their income.
NAB's general manager of home lending, Meg Bonighton, said the move was a response to the bank's regulatory obligations and to make sure customers could afford the loans they were taking out.
"We're conscious of concerns raised by regulatory bodies about Australia's household debt-to-income ratio, which has risen significantly over the past decade," she said.
"It is with this in mind that we are extending the use of this measure, which will be one of a number of assessments we do in order to ensure the customer is able to manage the new lending they're seeking."
"With this new measure, we will strengthen our ability to ensure we're providing our customers with the right home loan for their situation, and that they can meet their home loan repayments today and into the future."
The Australian Prudential Regulation Authority imposed a 30 per cent cap on new interest-only lending in March, and also urged banks to restrain their lending growth in "higher risk" segments, including those with high loan-to-income ratios.
While NAB already calculates loan-to-income ratios when assessing loans, it has not previously used the metric to determine whether a customer gets a loan, and such a blanket approach is understood to be unusual in the industry.
We're conscious of concerns raised by regulatory bodies about Australia's household debt-to-income ratio
Managing director of mortgage Homeloanexperts.com.au, Otto Dargan, said the changes appeared aimed at ensuring only customers with stronger prospects of repaying their loans would be able to get interest-only mortgages.
"They don't want people pushing themselves to the limit with an interest-only loan," he said.
The move comes after regulators expressed growing concern about rising household indebtedness, with the household debt-to-income ratio this week climbing to a record high of 190 per cent.
In particular, interest-only lending has become a top concern for financial regulators.
It is understood customers borrowing five or six times their incomes are seen as higher risk by banks.
ANZ, Commonwealth Bank, Westpac and National Australia Bank have already capped loan-to-value ratios for new interest-only loans at 80 per cent, and raised interest rates for interest-only customers. It is possible NAB's latest change is another lever to slow growth in this segment.