Authorised deposit-taking institutions’ mortgage lending standards tightened during the September quarter, with fewer loans originated with high loan-to valuation or debt-to-income ratios, while the level of non-performing loans declined. But APRA warned in its latest release of banking industry data, that asset quality will deteriorate when the RBA’s cash rate increases are fully reflected in mortgage rates. During the September quarter, 6.2 per cent of new mortgages had LVRs equal to or greater than 90 per cent. This is down from 6.4 per cent in the June quarter. The proportion of new loans with LVRs equal to or greater than 80 per cent fell from 32.1 per cent to 30.5 per cent over the same period. The proportion of outstanding mortgages with LVRs equal to or above 90 per cent fell from 3.6 per cent in the June quarter to 3.4 per cent in the September quarter, and the proportion with LVRs equal to or greater then 80 per cent fell from 17.8 per cent to 17.3 per cent. The proportion of new mortgages with DTI ratios equal to or greater than six times was 17.1 per cent in the September quarter. This is a fall of 7.2 percentage points from the series peak in the December quarter 2021. APRA said these changes have been driven by tighter lender standards, higher interest rates, which impact maximum loan size and repayments, and by the regulator’s increase in the serviceability buffer last year.  In October 2021, APRA increased the mortgage serviceability buffer from 2.5 to 3 per cent. The proportion of new interest-only mortgage lending increased by 0.6 per cent in the September quarter, compared with the June quarter. The proportion of interest-only loans among outstanding mortgages was unchanged at 11.1 per cent. APRA said the credit quality of ADIs’ residential mortgage portfolios improved during the quarter. Non-performing loans (overdue by 90 days or more) as a proportion of total owner-occupier outstandings declined from 78 basis points in the June quarter to 71 bps in the September quarter. Non-performing investment loans fell from 75 bps to 67 bps over the period. APRA said the effect of the increases in the cash rates since May has most likely not yet been fully reflected in variable rates due to a lag in transmission of cash rate increases to mortgage rates. “It is expected, however, that this effect will eventually be fully reflected in rates leading to a subsequent deterioration in asset quality,” it said. The value of funds in offset account increased over the period – up 5.8 per cent, compared with the September quarter 2021, to $238.8 billion. This is the highest value in offset accounts APRA has recorded.