Borrowers taking out high debt-to-income housing loans are not a homogenous group and the recent increase in their number does not necessarily point to higher default risks.
The Reserve Bank has detailed its research on high-DTI and high-LVR lenders, and the risks they pose, in the latest issue of the Financial Stability Review.
The share of new mortgage lending at high debt-to-income levels (at or above six times) rose to 24 per cent in the December quarter and has remained at high levels during the early part of this year.
There was also “notable growth” in high loan-to-valuation ratio loans (at or above 90 per cent) in 2020, as the share of lending to first home buyers increased. This has since declined.
Household survey data indicate that both high-LVR and high-DTI borrowers have been more likely to self-report missing a mortgage payment due to financial difficulties than other borrowers.
RBA research also shows that borrowers who miss a payment are more likely to miss subsequent payments and are at greater risk of default.
Higher gearing carries obvious risks in itself, but the riskiness of high-DTI and high-LVR loans will also be influenced by borrower characteristics, such as the level of income and wealth, and the size of liquidity buffers.
The RBA said survey data indicate that high-LVR borrowers have lower liquidity buffers, lower incomes and lower total wealth. This reflects that fact that first home buyers account for a large share of high-LVR loans.
Low buffers increase the incidence of mortgage stress for all borrowers but the effect is more pronounced for borrowers with high LVRs.
And while lower income increases the probability of mortgage stress for all borrowers, the impact on lower-income borrowers with high LVRs is greater because they are more exposed to unexpected increases in expenses and they have less capacity to save.
The data for high-DTI borrowers are mixed. They tend to have slightly higher liquidity buffers than low-DTI borrowers. But there is wide variation and high-DTI borrowers with low liquidity buffers are more likely to report mortgage repayment difficulties than other borrowers.
High-DTI borrowers are more likely to have lower incomes (which amplifies risks) but higher wealth (which reduces risks) and slightly higher liquidity buffers.
Among high-DTI borrowers, owner occupiers tend to be riskier than investors because they have lower incomes and lower wealth. Investors with high-DTI loans have higher incomes, higher liquidity buffers and higher wealth than owner occupier borrowers.
Investors with high-DTI loans are better able to deleverage by selling assets.
Borrowers with loans that are high-DTI, high-LVR and have low income “surpluses” are especially risky.