Australia: how APRA's debt-to-income limit and buffer cap home loans

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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Two rules written by the Australian Prudential Regulation Authority sit behind almost every home loan approved by an Australian bank. One is old and familiar to brokers: the serviceability buffer, which makes a lender test an applicant at an interest rate higher than the one actually offered. The other is new. Since 1 February 2026, APRA has limited how much of a bank's new lending may go to borrowers whose debt is six times their income or more.

Buyers, vendors and agents meet these rules without seeing them. They help explain why one lender says yes where another hesitates, and why a loan for a newly built home can be treated differently from a loan for an established one. Neither rule is addressed to the borrower. Both are addressed to the lender.

This guide sets out what each rule says, how a lender's position against the limit is counted, which loans are exempt, what goes into a serviceability test, and why APRA chose these tools. It draws on APRA's letter to lenders of 27 November 2025, the information paper and implementation details published with it, and APRA's practice guide on residential mortgage lending, APG 223.

APRA, letter to lenders of 27 November 2025 and practice guide APG 223 (version dated 19 June 2025).

Two rules that work at different levels

The serviceability buffer is a test applied to each loan. The lender takes the applicant's income, expenses and debts and asks whether the repayments could still be met if the interest rate were higher. If the answer is no, the loan does not pass the lender's standard policy.

The debt-to-income limit is a test applied to a lender's whole flow of new loans. It does not say that any one borrower may not borrow six times their income. It says that loans of that kind may not make up more than a fifth of what the lender writes. A borrower can pass the buffer comfortably and still be a high debt-to-income borrower; a lender can approve that borrower as long as it has room under its limit.

APRA's information paper of November 2025 describes the two as complements. The buffer, it says, protects against shocks to a borrower's ability to service a loan, which could otherwise end in default. The limit is aimed at the build-up of debt across the system. Both belong to what APRA calls macroprudential policy: settings meant to protect the financial system as a whole rather than to police a single institution.

Both sit in the same instrument: Attachment C of prudential standard APS 220, the credit risk management standard, under which the limit was activated and, according to APG 223, the buffer is set. APRA told lenders in June 2022 that the attachment would apply from 1 September 2022, so that such measures could be switched on quickly.

What the debt-to-income limit says

APRA wrote to all authorised deposit-taking institutions on 27 November 2025. Authorised deposit-taking institutions, or ADIs, are the banks, building societies and credit unions that APRA licenses. The letter, signed by APRA chair John Lonsdale, activated two limits with effect from 1 February 2026.

Under the first, an ADI may fund up to 20 per cent of its new owner-occupied loans at a debt-to-income ratio of six times or more. Under the second, it may fund up to 20 per cent of its new investment loans at a ratio of six times or more. The two limits are separate. Room left unused on the owner-occupier side cannot be spent on investors, and the reverse is also true.

The limits apply to every ADI that conducts residential mortgage lending in Australia. They cover new loans funded that are secured by residential property in Australia. APRA's information paper adds two points that matter to anyone who already has a mortgage: the limit covers new lending only and does not affect existing borrowers, and it does not depend on the size of a lender's existing loan book.

The ratio itself is defined in APRA's reporting standard ARS 223.0, the standard under which lenders already report their residential mortgage lending. The letter of 27 November 2025 refers to that definition and does not restate it, so the precise list of debts and the measure of income that go into the ratio are those of the reporting standard, not of the letter.

A worked example shows the scale of the threshold, on illustrative figures. Take a household whose income, as the reporting standard measures it, is A$150,000 a year. Six times that income is A$900,000. If the debts counted for that household come to A$850,000, the ratio is about 5.7 and the loan is not a high debt-to-income loan. At A$900,000 or more, it is. The threshold is "greater than or equal to" six, so a ratio of exactly six counts.

How a lender's share is counted

APRA's implementation details, dated 26 November 2025, set out the calculation. The share is measured by value, in dollars lent, and not by the number of loans. One large loan to a highly indebted borrower therefore uses more of a lender's room than several small ones.

The period over which the sums are made depends on the lender. APRA separates significant financial institutions, a category defined in its standard APS 001 and listed on a public register, from all other ADIs. The larger group is measured one quarter at a time. The others are measured on a rolling basis over the latest four quarters, which smooths out a single unusual quarter. APRA's information paper presents this as proportionality: smaller lenders also get a longer implementation period if they need one.

A worked example for a large lender, on illustrative figures. In one quarter it funds A$1,000 million of new investment loans, of which A$180 million is at a ratio of six times or more. Its share is 180 divided by 1,000, or 18.0 per cent, which is inside the limit.

A worked example for a smaller lender shows what the rolling measure does. Suppose it funds A$200 million, A$210 million, A$190 million and A$200 million of new owner-occupied loans over four quarters, A$800 million in all. Its high-ratio loans in those quarters are A$30 million, A$35 million, A$38 million and A$50 million, A$153 million in all. In the latest quarter alone the share is 50 divided by 200, or 25.0 per cent. Over the four quarters it is 153 divided by 800, or 19.1 per cent. Measured as APRA measures a lender of this kind, it is inside the limit.

The main reporting form is ARF 223.0, which every ADI mortgage lender already completes. A supplementary form, ARF 923.5, captures the exempt loans, because the main form does not identify them. Smaller lenders that wanted to carve out exempt loans had to tell APRA by 31 January 2026, with their reporting on the supplementary form starting from the quarter ending in June 2026.

Which loans are exempt

Three kinds of lending are left out of the count, according to the letter of 27 November 2025.

• Finance for the construction of new dwellings, as defined in reporting standard ARS 701.0.
• Finance for the purchase of newly erected dwellings, as defined in the same standard.
• Bridging finance, which APRA defines as owner-occupied lending during a period when borrowers intend to transfer their principal place of residence and also hold an existing owner-occupied loan.

The first two rest on housing supply. APRA's information paper says loans to build or buy new dwellings support new supply, and that additional supply can ease pressure on prices and so on the growth of household debt. The third rests on time. Bridging loans are temporary, the paper says, and do not add to system risk in the same way. APRA expects a bridging arrangement to be completed within twelve months of origination, an expectation it takes from paragraph 10 of its practice guide APG 112. The implementation details confirm that the bridging exemption applies to owner-occupied loans only.

An exemption changes both sides of the fraction. The exempt high-ratio loans come out of the top line, and all exempt loans come out of the bottom line. Return to the large lender in the earlier example, with A$1,000 million of new investment loans and A$180 million at six times or more. Suppose A$40 million of the total financed new dwellings, and A$30 million of that A$40 million was at a high ratio. The top line becomes 150, the bottom line 960, and the share falls from 18.0 per cent to 15.6 per cent. The figures remain illustrative.

What the limit means for a borrower

The limit does not prohibit any loan. APRA's information paper says that within the limit, lenders keep their discretion to lend to creditworthy high debt-to-income borrowers under their own risk appetite and policies. What the limit changes is the lender's arithmetic: each high-ratio loan uses part of a finite allowance.

The paper describes what a lender close to its cap can do. It can offer a loan at a lower ratio, which in practice means a smaller loan. It can defer an application. Or the borrower can go to another lender. Two applicants with the same income, the same debts and the same property may therefore get different answers from different banks on the same day, depending on how much room each bank has left in the period.

APRA did not expect the limit to change much at the start. The paper says no material near-term effect on access to credit was expected. Owner-occupiers and first home buyers typically borrow at lower ratios, it says, and so are unlikely to be constrained; for owner-occupiers it describes significant headroom under the 20 per cent line. For investors, the limit was expected to bind for only a small number of lenders and not for the system as a whole. APRA estimated in November 2025 that a small number of ADIs were near or at the cap after exemptions.

The investor figures show why the limit was aimed where it was. According to the same paper, the share of investor lending at a high debt-to-income ratio rose from 8 per cent to around 10 per cent by the September quarter of 2025, the highest since 2023. APRA also observed lending moving from ratios below four towards the range between four and six, lifting average ratios.

How the serviceability buffer works

The buffer is older than the limit and touches far more loans. APG 223, in the version APRA lists as current and dated 19 June 2025, says ADIs must apply a buffer over a loan's interest rate of at least 3.0 per cent, unless APRA determines otherwise.

The figure dates from 6 October 2021. In a letter to ADIs of that date, signed by the then chair Wayne Byres, APRA said lenders should operate with a buffer of at least 3.0 percentage points over the loan interest rate. Until then, APG 223 had set an expectation of at least 2.5. The letter described the purpose in two parts: a contingency for rises in interest rates over the life of the loan, and for unforeseen changes in a borrower's income or expenses.

APRA has kept the setting since. Its media release of 23 July 2025 said the buffer remained at 3 percentage points, and the information paper of 27 November 2025 listed it as steady alongside the new limit. In the July release Mr Lonsdale said the buffer had not been restrictive on new credit to the household sector. The November paper said the settings of all active tools would be considered once the debt-to-income limit had taken effect.

APG 223 adds detail on how the buffer is applied.

• It is added to the rate the borrower will actually pay over time, ignoring any introductory or honeymoon rate.
• It is used alongside a floor rate, a minimum assessment rate that matters when interest rates are low. APG 223 gives no figure for the floor; each lender sets its own.
• Buffers and floors are applied to the borrower's existing debts as well as to the new loan.
• Lenders are expected to review buffers and floors at least quarterly, and whenever rates change.

A worked example, on illustrative figures. Assume a loan of A$600,000 over 30 years, repaid monthly as principal and interest, at an assumed rate of 6.0 per cent. The monthly repayment is about A$3,597. With the buffer, the lender tests the applicant at 9.0 per cent, where the repayment is about A$4,828. The applicant must show capacity for roughly A$1,230 a month more than they will be asked to pay on day one. The rate is an assumption chosen for the arithmetic and is not a market figure.

What goes into the serviceability sum

The buffer is one input. APG 223 describes prudent practice for the others, and each of them moves the result.

Income first. Bonuses, overtime, investment income and variable commissions are, the guide says, typically discounted significantly. For an investor, the rent a property is expected to earn is cut by at least a fifth before it counts, and costs such as strata fees are taken into account as well. On illustrative figures, expected rent of A$2,500 a month would count as no more than A$2,000.

Expenses next. The guide refers to two benchmark measures of household spending, known as HEM and HPI, and says that relying on them alone would generally not meet APRA's requirements. A lender is expected to use the higher of what the borrower declares and an appropriately scaled benchmark. A reasonable housing cost is included even where the applicant reports none at present.

Then debts. A credit card is assessed on its limit, not on what is owed. The guide's example is a rate of three per cent a month on the total committed limit, so a card with a limit of A$10,000 would be counted as a commitment of A$300 a month even with nothing owing on it. Study debts under the HELP scheme are to be considered too; the guide accepts that leaving one out may be reasonable where it will be repaid within about 12 months, but treats that as an exception to policy.

Interest-only loans get their own treatment. APG 223 says serviceability is assessed on principal and interest repayments over the term that remains after the interest-only period, which makes the tested repayment higher than on the same loan repaid from the start. For owner-occupiers, APRA expects interest-only lending only where there is a sound and documented economic basis.

When a loan falls outside policy

What is left after income, expenses and stressed repayments is the net income surplus. APRA's implementation details describe it as allowable income, less all expenses considered in the serviceability assessment, less repayments assessed at the buffered rate. The supplementary reporting form sorts new loans into five bands by that surplus, from A$1,000 a month or more down to less than zero.

A loan approved outside a lender's serviceability policy or other lending parameters is what APG 223 calls an override. The guide is specific on one point: any loan where the borrower is assessed to have a net income surplus below zero must be recorded as an override, even if the shortfall is temporary. A waiver of income verification is an override as well. Lenders are expected to have defined approval processes, limits and reporting for overrides.

Overrides are therefore permitted, counted and watched. The same is true of the buffer itself at the level of the institution. In its letter of 6 October 2021, APRA said that where an ADI went on approving loans with a lower buffer beyond the end of that month, it would adjust that ADI's individual prudential capital requirements to reflect the higher credit risk in its new lending. Neither APRA's letter of 27 November 2025 nor its implementation details set out a consequence for a lender that exceeds the 20 per cent limit.

Why APRA chose a debt-to-income limit

The letter of 27 November 2025 gave three reasons. Housing credit growth had risen above its average since the global financial crisis. Housing prices were strengthening from already high levels. And high debt-to-income borrowing had begun to increase from low levels, driven by investors. Behind all three stands what APRA calls a key vulnerability of the Australian financial system: high household debt, which its information paper puts at about 180 per cent of household disposable income.

APRA was careful about what it was not saying. The letter notes that investor lending is typically not riskier when measured by default rates, but that it can amplify upswings in housing lending and prices, with consequences for financial stability. The information paper frames the limit as pre-emptive: lending standards were sound, and the aim was to contain a build-up before it happened.

The paper also records the alternatives. Limits on loan-to-valuation ratios were set aside because the evidence suggests they weigh most on first home buyers. A higher countercyclical capital buffer, which stood at 1 per cent of risk-weighted assets, was set aside because of its long lead times and limited evidence that it dampens debt in an upswing. Limits aimed specifically at investors were considered and kept in reserve.

On calibration, APRA says a 20 per cent limit would have been binding for investors in 2020 to 2022. It also compares its setting with limits abroad, some of which use a loan-to-income ratio in place of debt-to-income.

Earlier measures took other forms: APRA limited the growth of investor lending in 2014 and the concentration of interest-only lending in new loans in 2017. Its letter of October 2021 asked ADIs to review their risk appetite for high debt-to-income lending. It acted in November 2025 with the support of the Council of Financial Regulators.

Lenders outside the rules

Both rules bind ADIs. Lenders that do not take deposits are in a different position. APRA's information paper says non-ADI lenders account for about 4 per cent of residential mortgage credit and are not subject to its active macroprudential tools. APRA has the power to extend those tools to them if they contribute materially to financial instability, and says it has not done so to date. It will watch for spillover, meaning high-ratio borrowers moving to lenders outside the limit.

The paper also notes that smaller ADIs may see heavier and more volatile demand for high-ratio loans as larger ones become restricted. Larger ADIs have historically written far more of this lending, it says, and APRA does not expect the limit to fall disproportionately on smaller institutions.

Competition was part of the assessment. APRA consulted the Australian Competition and Consumer Commission on the effects, and says they are weighed against the benefits for financial stability and will be monitored over time.

What APRA has said it will watch

The limit has no end date. The information paper sets no fixed review and says nothing about removal. APRA has committed to monitoring the residential mortgage market with the other members of the Council of Financial Regulators and to adjusting settings if appropriate. The paper says it will consider additional limits, including limits specific to investors, if macro-financial risks rise significantly or lending standards weaken.

The buffer is on the same table. APRA's paper said it would reassess all active settings after the limit took effect. The figure of 3 percentage points is the one in the practice guide and in APRA's statements up to that paper, and APRA can determine a different buffer under the same standard.

The buffer decides whether one borrower can carry one loan. The limit decides how many heavily indebted borrowers a bank may take on at once.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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