Given bank blindspot, APRA's Wayne Byres again warns households on the prospect of rate rises

Australian Prudential Regulation Authority chairman Wayne Byres told a Senate committee yesterday that he is worried some home loan borrowers have not properly considered the impact of rising interest rates.

He suggests these borrowers might be wrong to assume future wage growth will help retire their borrowings.

Low interest rates are "making high debt levels affordable and that won't always be the case, and that's at the heart of what we are thinking about," he advised.

He's urged bankers to exercise caution because there "a lot of things that seem at extremes".

"Household debt levels are very high relative to household income in particular…and is still on an upward trajectory," Mr Byres said.

"Interest rates are at historically low levels and household income growth is actually relatively subdued, so the idea that people will pay their debs off in the future just because their income will grow strongly is not an assumption you can necessarily make."

He told the senate committee APRA continued to work to reinforce sound lending standards.

"The measures we’ve taken appear to be having a positive impact with strengthened serviceability assessments, moderating investor loan growth and a reduction in high loan-to-valuation lending, and our most recent benchmark for interest only lending to remain below 30 per cent of total new lending looks like it has been comfortably achieved overall."

Mr Byres said on Monday the household debt-to-income ratio (DTI) would need to be "constrained" before lending limits on banks will be lifted.

He reiterated the DTI ratio was important because it shows the ability of a customer to pay back all their debts, not just a particular loan.

He suggested the DTI will be improved once banks adopt 'positive' credit reporting, overcoming a current "blindspot" of banks not being able to see their customers' full financial picture.