What if...: Annette Sampson
Lax loan assessments, interest-only and high-risk loans are put under the microscope
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.