APRA's recent tightening on interest-only loans is likely to “have a bigger impact on lending to owner-occupiers than on investors”, according to ratings analysts.
The main changes, announced by the Australian Prudential Regulation Authority (APRA) last week, require banks to limit interest-only loans for new lending to 30 per cent and “place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent”.
In a blog post on the Fitch Wire credit market commentary page, the analysts suggested that while the new macro-prudential regulations “should rein in growth in some riskier types of mortgage lending”, the tighter limits on interest-only mortgages with higher LVRs is “likely to have a bigger impact on lending to owner-occupiers than on investors”.
The post reads, “Owner-occupiers account for most loans with high LVRs, and we have previously pointed to the risks associated with interest-only lending to owner-occupiers. Investors can deduct interest payments from tax, which provides an incentive for these borrowers to maximise their loan amount. Owner-occupiers do not receive the same benefit, which means that they are more likely to be driven toward interest-only loans by financial constraints. Moreover, household finances are currently coming under pressure from low wage growth.”
Indeed, in the Reserve Bank of Australia’s statement following its cash rate decision yesterday, governor Philip Lowe commented, “Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness.
“Lenders need to ensure that the serviceability metrics they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.”
As such, the ratings company warned that even though Australian banks have already started to raise lending rates (primarily on investor and interest-only mortgages), lending rates for interest-only mortgages, particularly those with high LVRs, “are likely to rise further”.
More restrictions expected later this year
Notably, however, the analysts note that the tightening “did not go as far as expected” and warned that there could be more restrictions introduced “later in the year”.
Fitch’s blog reads, “Tighter macro-prudential regulations introduced in Australia [recently] should rein in growth in some riskier types of mortgage lending and support the resilience of banks' asset quality to a potential downturn in housing market conditions.
“However, the measures do not go as far as many commentators, including Fitch Ratings, had expected. House price growth could still remain high and some risks may continue to build, which might lead the regulator to tighten restrictions again later in the year.”
Fitch Ratings added that the regulator “appears sensitive as to the risks of tightening the market too much, given the supply of new builds that is expected to enter the market towards the end of 2017 and beyond”.
The concerns raised by Fitch echo those made by some industry representatives, including MoneyQuest managing director Michael Russell who has said that the measures are “counterproductive to mortgage stress”, while Steve Jovcevski, a property expert from comparison site Mozo.com.au, has opined that many owner-occupiers and investors who have previously taken out an interest-only loan are now being “left in the lurch” as they find out they no longer qualify.
[Related: Zero growth in mortgage settlements in 2016]