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Low rates have led to mortgage ‘buffer’, says Treasurer

Low rates have led to mortgage ‘buffer’, says Treasurer

Low interest rates have allowed Australian borrowers to build a mortgage “buffer” that could shield them from financial stress, according to Treasurer Scott Morrison.

Speaking to Melbourne radio station 3AW on Wednesday (21 February), the Treasurer commented on Reserve Bank of Australia (RBA) assistant governor Michele Bullock’s address to the Responsible Lending and Borrowing Summit, highlighting that some borrowers may be facing impending mortgage stress.

While Mr Morrison acknowledged the impact of mortgage stress on Australians, he argued that households are better equipped to cope with such stresses as a result of low interest rates in the past few years.

He said: “[O]ne of the things that has happened over the last three or four years is when interest rates fell, most householders kept paying their mortgage at around about the same rate.

“So, they built up a buffer and that average buffer now is about two years on average and two and a half years for owner-occupiers, so they’ve got ahead of their mortgage payments and thats been very sound that those Australians have done that.

“[Because] of the way our mortgage market works in Australia, we have built in that buffer which gives us a bit more resilience in [times of financial stress].”

The Treasurer said that he also believes that prospective borrowers are better placed to manage stresses due to tightened lending standards.

“[If] youre getting a new loan now, the lending criteria on those new loans — because those have been tightened up — means that youre in a better position to meet that, then perhaps previously those assessments would have suggested,” Mr Morrison said.

The Treasurers comments come after the Reserve Bank of Australia said that it was keeping a watchful eye on interest-only mortgagors whose terms are due to expire between this year and 2022, as it fears some may find the “step-up” to P&I repayments “difficult to manage”.

In her address to the Responsible Lending and Borrowing Summit on Tuesday (20 February), the assistant governor of the Reserve Bank of Australia (RBA), Michele Bullock, spoke about household indebtedness and mortgage stress.

Ms Bullock said that while mortgage stress has declined since 2011 (largely as a reflection of the fall in interest rates since that time) and that the number of those classed as being in some financial stress is “not growing rapidly”, around 12 per cent of owner-occupiers with mortgage debt indicated that they would expect difficulty raising funds in an emergency.

“Lending standards have erred on the more relaxed side”

One area that Ms Bullock particularly focused on was interest-only (IO) loans and the ability of mortgagors to repay the principal of these loans following the expiry of the IO period.

Noting that “the increasing popularity of interest-only loans over recent years meant that, by early 2017, 40 per cent of the debt did not require principal repayments”, the assistant governor said that “this presents a potential source of financial stress if a household’s circumstances were to take a negative turn”.

Notably, Ms Bullock revealed that regulators — in the past few years  have been “concerned that lending standards have erred on the more relaxed side”, adding: “An exuberant housing market in some parts of the country and strong competition among lenders raised the question of whether financial institutions had been appropriately prudent in assessing a household’s ability to meet repayments.

“In response, a number of measures were implemented by APRA and ASIC to strengthen mortgage lending standards. These measures have helped improve the quality of lending over the past couple of years. But there is still a large stock of housing debt out there, some of which probably would not meet the more conservative lending standards currently being imposed.”

Ms Bullock noted that as a “large portion” of principal-free periods begin to expire, some borrowers may therefore struggle to service their mortgages.

She said: “[A] large proportion of interest-only loans are due to expire between 2018 and 2022. Some borrowers in this situation will simply move to principal and interest repayments as originally contracted.

“Others may choose to extend the interest-free period, provided that they meet the current lending standards. There may, however, be some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage.

“This third group might find themselves in some financial stress. While we think this is a relatively small proportion of borrowers, it will be an area to watch.”

[Related: APRA endowed with new crisis powers]

Low rates have led to mortgage ‘buffer’, says Treasurer
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