The banking regulator is warning that household debt remains too high and that Australia's debt binge is on a dangerous trajectory in an era of record low interest rates.

Key points: High loan-to-income mortgages are more prevalent than in other similar countries, such as the UK and Ireland

High loan-to-income mortgages are more prevalent than in other similar countries, such as the UK and Ireland APRA focusing on large loans to borrowers leaving them with little after tax income to pay other expenses

APRA focusing on large loans to borrowers leaving them with little after tax income to pay other expenses Regulator has already cracked down on interest-only and investor home loans with growth limits and caps

Australian Prudential Regulation Authority (APRA) chairman Wayne Byres pointed to an environment of "heightened risk" as the banking watchdog ramps up its monitoring of responsible bank lending.

"Household indebtedness is high. Perhaps more importantly, the trajectory is clearly for it to rise further," Mr Byres told a business conference in Sydney.

"Lenders need to be vigilant to ensure their policies and practices are both prudent and responsible.

"In short, heightened risk requires heightened prudence by APRA but also — and preferably — by lenders and borrowers themselves."

Mr Byres said the regulator has only noted a "slight moderation" in borrowers being granted loans that represent six times their income, where borrowers need to commit half their after tax earnings to repayments.

"High LTI (loan-to-income lending) in Australia is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates such as the UK and Ireland," Mr Byres said.

With housing loans representing over 60 per cent of lending in the Australian banking sector, the regulator has been ramping up measures to restrict loans to investors amid recent fears of a real estate bubble in Sydney, Melbourne and parts of Brisbane.

In a keynote address to the Australian Securitisation Forum, Mr Byres said a key focus for APRA will be to ensure housing borrowers are given loans they can realistically service.

"We have confirmed there is more to do in this area to improve serviceability measures, particularly in relation to the assessment of living expenses and the identification of a borrower's existing debts," he said.

Mr Byres said APRA will be paying "particular attention" to bank lending with a low net income surplus (NIS), which is what borrowers have left over after living expenses and debt repayments.

"Low net income surplus borrowers are obviously vulnerable to shocks, " Mr Byres said.

"We have been challenging lenders to ensure that their serviceability methodology is robust and that includes adequate conservatism to ensure that borrowers are not unduly exposed if their circumstances were to change."

While citing a "broadly positive picture", Mr Byres warned that the trend for non-performing housing loans was moving higher despite a "relatively benign" scenario for lenders and borrowers.

"The overall rate of non-performing housing loans is drifting up towards post crisis highs without any sign of a crisis," he observed.

"It does support the proposition that the need to reinforce lending standards was warranted."

Mr Byres said strong growth to investors has been curtailed, with aggregate housing growth now at just over 6 per cent and cited the Reserve Bank's latest financial stability review declaring that an "imbalance" had been halted but not reversed.

"Lenders have been forced to improve their information management systems which, in the absence of any regulatory requirements, had grown lax," the regulator noted.

APRA's latest warning about rising household debt follows similar comments from the Reserve Bank of Australia, where governor Dr Philip Lowe has expressed concerns about debt servicing in an environment of low wages growth.

Earlier this year, APRA cracked down on interest-only home loans, ruling that they should comprise no more than 30 per cent of new lending in a given quarter.

Mr Byres said the new measure prompted a switch to principal and interest payments, with interest-only loans falling by 7 per cent or around $36 billion.

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Non-bank lenders face APRA supervision

My Byres also sought to ease concerns about APRA being given new powers to supervise smaller lenders which are not authorised deposit taking institutions (ADIs).

"We see it very much as a reserve power. That means most of the time the power to impose rules will remain dormant. Non-ADI lenders will go about their business as they have always done," Mr Byres said.

"For those of you uncomfortable at the thought of APRA supervising non-ADI's let me assure you the feeling is mutual."

Non-ADI lenders account for less than 10 per cent of housing finance and the proposed legislation would allow APRA to intervene if smaller lenders contribute to risks of instability in the Australian financial system.

Follow Peter Ryan on Twitter @peter_f_ryan.