Powered by MOMENTUM MEDIA
subscribe to our newsletter

RBA lauds ‘effective’ tightening of lending standards

The Reserve Bank has pointed to new research suggesting that tighter lending standards have improved financial stability in the mortgage market.

In an address to the 2019 Property Leaders’ Summit in Australia, the Reserve Bank of Australia’s (RBA) head of financial stability, Jonathan Kearns, discussed the factors contributing to the continual rise in home loan arrears.

The latest data from ratings agency Standard & Poor’s reported that over 30-day delinquencies underlying Australia’s residential mortgage-backed securities (RMBS) increased to 1.53 per cent in April, up from 1.51 per cent in the previous month and from 1.36 per cent in April 2018.

Mr Kearns claimed that “cyclical upswings” in arrears are attributable to weak economic conditions, which include falling or stagnant wages, and softness in the housing market – which may inhibit some borrowers from selling their property to ease their mortgage burden.

The head of financial stability also acknowledged that tighter lending standards can conversely impact a borrower’s ability to meet their mortgage repayments, pointing to previous restrictions on interest-only lending, which prevented borrowers from rolling over the interest-only period.

Advertisement
Advertisement

Mr Kearns also conceded that tighter serviceability measures may prevent distressed borrowers from refinancing their loan, cited by S&P as one of the factors contributing to the rise in delinquencies.

However, Mr Kearns pointed to internal data collected by the Reserve Bank, which suggested that the application of tighter lending standards has been “effective” in improving credit quality.

“Using the Reserve Bank’s Securitisation Dataset, we find evidence consistent with more recent cohorts of loans having lower arrears rates than earlier cohorts,” he said.

“Specifically, those loans originated in the past few years have an arrears rate that is up to one-quarter of a percentage point lower than loans originated prior to 2014.

“The lower arrears rates for more recent loans suggest these tighter lending standards have been effective.”

PROMOTED CONTENT


The Australian Prudential Regulation Authority (APRA) has since eased some of its lending restrictions by removing its caps on investor and interest-only lending.

APRA is also proposing to remove its 7 per cent interest rate floor for mortgage serviceability assessments.

However, despite noting the improvement in credit quality for less-seasoned loans, Mr Kearns said he expects the overall arrears rate to continue rising but claimed the trend would not pose a significant threat to financial stability.

“To the extent that we can point to drivers of the rise in arrears, while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer,” he said.

“But with overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”

[Related: Rate cuts tipped to ‘boost’ GDP if global risks temper]

RBA lauds ‘effective’ tightening of lending standards
Jonathan Kearns
mortgagebusiness

If you’re feeling overworked and overwhelmed in this fast-paced mortgage market, it’s time to make some changes, and the Business Accelerator Program can help! Tickets are on sale now. Work smarter, not harder, this year.

Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

Latest News

The financial services regulator has released examples of how the incoming rules for add-on insurance will work for CCI, among other credit ...

The major bank has said that it is committed to the sale of its Pacific businesses despite a competition regulator knocking back their propo...

A prime residential lender has announced the pricing of one of its largest prime residential mortgage-backed securities to date. ...

Join Australia's most informed brokers

Do you know which lenders are providing brokers and their customers with the best service?

Use this monthly data to make informed decisions about which lenders to use. Simply contribute to the survey and we'll send you the results directly to your inbox - completely free!

How long do you think it should take to discharge a mortgage?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.