‘Hippo’ lending bloats housing market
They’ve ridden on the back of this capital-gains hippo for too long.
Interest-only deals may ‘‘expire’’ in theory, but are often re-issued for a consecutive term by banks that have benefited from the house-price bloat.
Once their customer has snaffled some free equity from a tight market, the risk of the mortgage gets less. The house will easily sell for more than the original loan. It’s perverse that price-bloating reduces the risk for the designers of the hippomortgage. There’s no natural hand-brake on the product.
I’ll admit it, I was once a banker. But back then, an interestonly mortgage was something you whispered about.
Of course they existed and I’m pretty sure I had one for a year or two. It was 20 years ago and we were getting married and moving overseas. A bit of short-term relief helped fund it all.
I recall getting a very stern lecture about the perils from the credit department. Mind you, with double-digit interest rates, the sombre chat was warranted.
There are some perfectly valid reasons for a home-owner asking for an interest-only solution.
Mostly these surround lowering expenses for a short period due a change in circumstances – a home renovation, starting a family, losing a job or a drop in income. Repayment holidays are also possible when things get tough.
What valid reason is there for an interest-only mortgage, especially in a climate of dire housing affordability? If you don’t live in the house, interest-only should be banned. If you want to roll over an interest-only mortgage, you should be declined. Sell some houses and realign your portfolio with what you can actually afford.
If you’re a homeowner who can’t afford a repayment mortgage on day one, come back when you can. If you’re a commercial developer creating new housing supply that’s different: approved.
Would a ban on interest-only really make a difference to the housing market? You bet your socks it would. There are $213 billion worth of mortgages in New Zealand and 28 per cent of these are interest-only ($60b). The Reserve Bank just started monitoring the ‘‘trend’’. Err, bit late. Scary numbers are coming out. In May, 38 per cent of mortgages were interest-only. In June, 41 per cent. That’s a mighty big lever we’ve got to play with.
Westpac just announced a reduction in the length of their interest-only product from a 15-year term to five years. Back in 2014 they had a 30-year product. A few banks already have five-year limits and some 10 years.
The first Hippo in the room is why do you even need a five-year period of paying interest-only?
The second Hippo is what stops the banks with a five-year term rolling over into another?
The time limit is just a checkpoint on their risk exposure. So announcements on reduced terms are just well-intended bluster.
Is it any surprise my banking career was short-lived? My boss at the time was Grant Spencer (currently Deputy Governor of the Reserve Bank). We both worked in a dark rat-hole called Treasury.
This is a man who understands the markets very well, from both the point of view of a bank and the Reserve Bank. Now he’s no longer on the dark side he might be able to grab the lever and switch it to off mode.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.