National Australia Bank (NAB) announced it would automatically reject customers who want to borrow a high multiple of their incomes and only pay interest on their home loans (an approach that is not used by other lenders in the mortgage market), from July 8 onwards. The bank’s decision comes amid growing concerns about the risks created by rising household indebtedness.

The Melbourne-based bank would not reveal what loan-to-income ratio it considered to be high, but said the move signals a tougher stance towards interest-only borrowers. Such borrowers are already grappling with higher interest rates, heftier deposit requirements, and shorter loan terms.

Banks are toughening up on interest-only customers because the nation’s regulators fear that the boom in interest-only lending could create risks for the economy if borrowing costs rise or if there is an economic downturn.

Meg Bonighton, NAB’s general manager of home lending, said the move was a result of the bank’s obligations to the Australian Prudential Regulation Authority (APRA). In March, APRA told lenders to restrict higher-risk interest-only loans to 30% of new residential mortgages. NAB also wanted to ensure that customers could afford the loans they were taking out.

“We're conscious of concerns raised by regulatory bodies about Australia's household debt-to-income ratio, which has risen significantly over the past decade,” Bonighton said. “It is with this in mind that we are extending the use of this measure, which will be one of a number of assessments we do in order to ensure the customer is able to manage the new lending they’re seeking.”

Moving forward, the bank hoped to strengthen its ability to provide customers with the right home loan for their situation. “[This way] they can meet their home loan repayments today and into the future,” she said.

While NAB already calculates loan-to-income ratios when assessing loans, it previously did not use this metric to determine whether a customer gets a loan. Such a blanket approach is considered to be highly unusual in the mortgage lending industry.