In its summary of third-quarter capital, funding and asset quality, Westpac noted that interest-only (IO) applications made up 36 per cent of flow in the third quarter, down from 47 per cent in the second quarter. As such, the bank considers itself to be “on track” to have flow of IO lending below the mandated 30 per cent in the fourth quarter of 2017.
In May, the Australian Prudential Regulation Authority (APRA) directed lenders to keep new IO lending to below a 30 per cent benchmark. Lenders were also instructed to keep investor lending growth to beneath 10 per cent.
Westpac anticipates interest-only applications to slow to 24 per cent and settlements to 30 per cent in the fourth quarter.
Additionally, the bank reported investor lending growth of 5.9 per cent in the third quarter. In October 2016, this figure was 4.4 per cent. Conversely, owner-occupied lending growth has slowed from 9.8 per cent in October 2016 to 6.3 per cent.
In order to meet APRA’s targets, Westpac introduced different pricing for IO and investor loans.
Currently, owner-occupied rates are at 5.24 per cent per annum (p.a.) for principal and interest repayment structures. Rates take a step up for IO repayment structures, currently sitting at 5.83 per cent p.a. Principal and interest investor loans are another tier higher at 5.79 per cent p.a., while investor IO loans are 106 basis points higher than a principal and interest owner-occupier loan, at 6.30 per cent p.a.
Westpac said that it had been a deliberate strategy to make IO rates “at least” 50 basis points higher than the equivalent principal and interest loan, and investor loans at least 47 basis points higher than the equivalent owner-occupied loan.
The bank also listed its maximum 80 per cent loan-to-value (LVR) ratio on all new IO loans as a change made to meet the target, as well as the decision to scrap the repayment switch fee for clients moving from principal and interest repayment structures from IO. The bank is also refusing to accept external refinances for owner-occupied IO loans.
In the third quarter, 6,778 clients moved from IO to principal and interest, and of that, 3,774 of the moves were client-initiated. In the prior quarter, the total figure was 4,798, and of that, customer-initiated switches were 2,206.
As such, Westpac has experienced an increase of 41.5 per cent in client-initiated switches.
Consumer credit changes
Westpac and its subsidiaries (St George, Bank SA and Bank of Melbourne) announced on 21 August changes to its credit policies effective 27 August at Westpac and 28 August at its subsidiaries.
The changes include increased attention to clients’ income: bonuses must be excluded before income is annualised. Additionally for Westpac clients, copies of receipts of deposits paid to builders, developers and real estate agents can now be registered as genuine savings provided that the funds have been held by the developer, real estate agent or builder for at least three months and the client can prove the funds were not borrowed.