In short:

The banking regulator APRA is ordering the institutions under its supervision to limit high debt-to-income loans to 20 per cent of all new loans approved.

A high debt-to-income loan is defined as one where the amount borrowed is more than six times the borrower's annual household income.

What's next?

The new cap on high debt-to-income loans takes effect on February 1.

The banking regulator will impose restrictions on home loans from early next year to limit the number of "high-risk" large loans being issued to customers,which could have flow-on effects in the housing market.

The Australian Prudential Regulation Authority (APRA) will impose so-called macroprudential restrictions on home loans from February 1, meaning that no more than 20 per cent of a bank's new loans can have a debt-to-income (DTI) ratio of more than six.

For example, a household with an annual household income of $100,000 a year receiving a loan greater than $600,000 would be counted towards that limit.

The regulator says the 20 per cent cap will apply separately to investor and owner-occupier loans, to avoid the risk of investors "crowding out" owner-occupier buyers.

APRA said the 20 per cent cap was expected to bite harder for investors, who tended to borrow more relative to their incomes.

The Australian Prudential Regulation Authority's chair, John Lonsdale, said the banking regulator was acting pre-emptively to head off risks generated by a booming housing market.

"One of the key structural risks to system stability that APRA has long been concerned about is high household indebtedness," he noted in a statement.

"Rising indebtedness has in the past often been associated with an increase in riskier lending and rapid growth in property prices."

Government welcomes move, Greens call for tougher investor limits

When asked in a media briefing whether the treasurer, Reserve Bank and other regulators had been consulted about the move, Mr Lonsdale confirmed they had.

Treasurer Jim Chalmers released a statement this morning backing the regulator's action.

"These are important changes that will help with financial resilience and housing affordability," he argued.

"It's about managing emerging risks in our financial system and will help people into the market."

However, Greens Senator Barbara Pocock, who recently wrote to the treasurer and APRA calling for macroprudential intervention in home lending, said the limits were not tough enough.

Property investment is ingrained in the Australian psyche, but is it too easy to cast landlords as the villain in our housing crisis?

"$40 billion has gone to investors in the last three months, and APRA and Chalmers need to stop the tens of billions flowing to investors," she said.

"APRA must use all the tools in their toolbox to rein in investor lending that is exacerbating the housing affordability crisis."

Australia's bank regulator has never imposed a cap on high debt-to-income lending before but other nations, such as the UK and New Zealand, have had similar restrictions for many years.

APRA did impose a 10 per cent per annum limit on investor lending growth in 2014 and added a cap limiting interest-only lending to 30 per cent of new loans in 2017, both of which were removed during 2018.

Australia's largest recent home price correction occurred during this period from late 2017 to early 2019, where values fell 8.2 per cent nationally, led by an even steeper decline in Sydney.

Few banks and borrowers likely to be affected

The regulator said, overall, only about 4 per cent of new owner-occupier loans and 10 per cent of new investor loans were above the six-times income threshold, but added that there was a small number of institutions that were already near or above the 20 per cent cap.

"Although broader risks are contained, we have seen in the past that they can build rapidly when interest rates are low or declining, borrowers extend themselves and competition among banks for new mortgage lending intensifies, which can lead to easing lending standards," Mr Lonsdale warned.

Banking analyst Jon Mott from Barrenjoey said the current restrictions were unlikely to have much immediate effect when they started next February.

Amid global warnings of impending financial doom, APRA and the Reserve Bank are far more concerned about a home-grown bubble, one that's been taking in oxygen for almost three decades. 

"While it is positive to see APRA is focused on the potential build-up of risk in the housing system given very over-leveraged Australian households, this policy is unlikely to be a binding constraint in the short to medium term," he noted.

Mr Mott's analysis of APRA's data reveals that high DTI lending had risen fractionally to 5.5 per cent of new borrowing in the June quarter of 2025, up from a low of 5.0 per cent in June 2024, with the major banks making slightly more of these riskier loans (6.8 per cent).

However, he noted that this is down from a peak of 24.4 per cent (around 28.1 per cent for the major banks) in December 2021, during the zero interest rate policy period, and around 15 per cent prior to the pandemic.

Mr Mott expects the Reserve Bank to do more to cool the housing market next year than the banking regulator.

APRA said bridging loans and loans for the construction of new dwellings would be excluded from the cap to avoid wider disruptions across the home building sector and keep out of the way of federal and state government ambitions to increase new home building.

Australian Banking Association CEO Simon Birmingham welcomed APRA's "targeted and considered approach".

"It is important that settings maintain access to safe financing through banks and not create any barriers that could unduly push borrowers into higher-risk non-bank lenders," he said.

"Whilst macroprudential policy settings are important for financial stability, the best way to address housing affordability is to boost supply, and we therefore welcome APRA's exemption of loans for new dwellings."

APRA does have powers to impose macroprudential controls on entities that it does not normally regulate, such as non-bank lenders, if it believes that their behaviours are creating vulnerabilities for the broader financial system.