What if...: An­nette Samp­son

Lax loan as­sess­ments, in­ter­est-only and high-risk loans are put un­der the mi­cro­scope

Money Magazine Australia - - CONTENTS - An­nette Samp­son has writ­ten ex­ten­sively on per­sonal fi­nance. She was per­sonal fi­nance edi­tor with The Syd­ney Morn­ing Her­ald, a for­mer edi­tor of the Her­ald’s Money sec­tion and a colum­nist for The Age. She has writ­ten sev­eral books.

THE STORY SO FAR

The Aus­tralian Pru­den­tial Reg­u­la­tion Author­ity (APRA) has al­ready had a cou­ple of goes at cool­ing the prop­erty in­vest­ment lend­ing mar­ket. In De­cem­ber 2014 it in­tro­duced a limit of 10% a year on growth in lend­ing to prop­erty in­vestors. It also warned it would not look kindly on lenders do­ing a lot of high-risk lend­ing, such as lend­ing at high loan-to-val­u­a­tion ra­tios (LVR), lend­ing on in­ter­est-only terms to owner-oc­cu­piers, and lend­ing for very long terms. It asked lenders to put greater em­pha­sis on whether bor­row­ers could ser­vice their loans, es­pe­cially if in­ter­est rates were to rise.

Along­side this, the Aus­tralian Se­cu­ri­ties and In­vest­ments Com­mis­sion (ASIC) re­viewed in­ter­est-only loans, which led to a num­ber of lenders hav­ing to tighten their re­quire­ments to pay more at­ten­tion to bor­row­ers’ liv­ing ex­penses.

In April, ASIC an­nounced it would con­duct tar­geted in­dus­try sur­veil­lance on in­ter­est-only loans to iden­tify lenders and bro­kers rec­om­mend­ing high num­bers of these loans to see whether fur­ther ac­tion is needed. While in­ter­est-only loans may be suit­able for some peo­ple, ASIC says they are more ex­pen­sive than other loans and for the vast ma­jor­ity of owner-oc­cu­piers in par­tic­u­lar they just don’t make sense.

In March, ASIC also com­pleted a re­view of the mort­gage broking mar­ket, which iden­ti­fied risky prac­tices in­clud­ing con­flicts of in­ter­est, lax as­sess­ment of ex­penses and a propen­sity to di­rect bor­row­ers to more risky types of loans.

APRA has also writ­ten to lenders re­quir­ing them to limit new in­ter­est-only loans to 30% of their to­tal new res­i­den­tial mort­gage lend­ing. It also wants them to put strict con­trols on in­ter­est-only loans with LVRs over 80%, en­sure there is strict scru­tiny of any loans over 90% and man­age lend­ing to in­vestors so as to stay com­fort­ably be­low that 10% cap on growth.

WHAT IT MEANS FOR IN­VESTORS

Loans for in­vest­ment hous­ing fell in 2015 but have been ris­ing again. The value of in­vest­ment loans fell by 1% na­tion­ally in April but it is still too early to say whether this is the start of a cool­ing in the in­vest­ment mar­ket, or just a tem­po­rary lull.

What we can say with cer­tainty is that lenders are in­creas­ingly get­ting tougher on in­vest­ment loan re­quire­ments. More than half the 33 econ­o­mists and ex­perts sur­veyed in May by the web­site finder.com. au be­lieve in­ter­est-only bor­row­ers, in par­tic­u­lar, could have prob­lems re­fi­nanc­ing when their cur­rent loans ma­ture. A fur­ther in­ter­est-only loan will be harder to get, and bor­row­ers switch­ing to prin­ci­pal and in­ter­est will be hit by a hefty rise in re­pay­ments, which they may struggle to af­ford. For ex­am­ple, Finder an­a­lyst Gra­ham Cooke says the re­pay­ments on an $800,000 in­ter­est-only loan at 4% would be $2667 a month

ver­sus $3819 on a prin­ci­pal and in­ter­est loan at the same rate.

The Re­serve Bank says some lenders have in­creased the price of in­ter­est-only loans to re­flect their higher risk. It says the four ma­jor banks have an­nounced an 0.18% pre­mium for in­ter­est-only loans to home own­ers, and a 0.15% pre­mium for in­vestors – on top of any pre­mium they al­ready pay for hav­ing an in­vest­ment loan.

Non-bank lenders not reg­u­lated by APRA saw an up­surge in in­vestor ap­pli­ca­tions fol­low­ing the in­tro­duc­tion of the 10% cap on in­vest­ment lend­ing growth and have been gear­ing up for fur­ther growth fol­low­ing

the lat­est re­stric­tions. How­ever, APRA has warned it will also be look­ing at so-called “ware­house fa­cil­i­ties” used by banks and other reg­u­lated lenders to al­low non-bank lenders to build a port­fo­lio of loans that will even­tu­ally be se­cu­ri­tised. The fed­eral bud­get also laid out plans to bring non-bank lenders un­der APRA’s su­per­vi­sion.

RISK TO OWNER-OC­CU­PIERS

While in­vestors are the big­gest users of so-called “high-risk loans”, a grow­ing num­ber of owner-oc­cu­piers have been bor­row­ing on an in­ter­est-only ba­sis as they could af­ford to ser­vice a larger loan. This will be more dif­fi­cult with in­ter­est-only loans capped at 30% of new lend­ing. Many house­holds are pro­tected from a down­turn or higher in­ter­est rates be­cause they’ve made pre-pay­ments on their loans. Bal­ances in off­set ac­counts, re­draws and so on ac­count for a high 17% of out­stand­ing loans – or around 2½ years’ worth of re­pay­ments. But as the Re­serve Bank points out, not every­one is so well pro­tected. About a third of bor­row­ers have no buf­fer, or less than one month’s re­pay­ments, which leaves them vul­ner­a­ble. On an­other level, any ex­o­dus of in­vestors from the mar­ket would also af­fect house prices more broadly. The Re­serve Bank has warned that in­vestors am­plify both the highs and lows of cy­cles, par­tic­u­larly when they are highly in­debted. An ad­di­tional fac­tor in the mix is the in­flu­ence of overseas in­vestors who are also about to be hit with tougher mea­sures an­nounced in the bud­get.

And while a po­ten­tial fall in prices might sound like good news for would-be firsthome buy­ers, they would also be af­fected by any ac­com­pa­ny­ing slow­down in the broader econ­omy.

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