‘Hippo’ lending bloats the housing market
designers of the hippo-mortgage. There’s no natural hand-brake on the product.
I’ll admit it, I was once a banker. But back then, an interest-only 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. 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 interestonly. 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.