Can Australian banks handle mortgage risks?

And how about higher risk loan types?

It has been noted that Australian banks' generally strong loss absorption capacity leaves them well positioned to deal with increasing risks in their mortgage books.

According to a release from Fitch Ratings, however, potentially higher risk loan types, including investor and interest-only loans, continue to make up a high proportion of quarterly loan approvals.

The release said this was shown in the agency's latest APAC Chart of the Month report.

Here's more from Fitch Ratings:

Fitch also states that further cuts to interest rates may ultimately lead to the implementation of macro-prudential tools, particularly if they contribute to additional strong growth in some of these riskier loan types.

These macro-prudential tools would allow the regulator to influence the banks' risk appetite, thereby preserving asset quality and limiting potential losses in the event of an economic shock.

While investor and interest-only loans remain a large component of new mortgage approvals, other measures show some moderation in risk.

90+% loan-to-value ratio loans continue to fall as a proportion of new approvals, while borrowers appear to be taking advantage of the low rates to further pay down mortgage balances ahead of schedule.