Mortgage appetite ‘activated’ by serviceability changes

The Council of Financial Regulators (CFR) – which consists of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and Treasury – recently downplayed the stimulatory impact of floor rate cuts to mortgage serviceability assessments.

In its quarterly Financial Stability Review, the CFR said that it expects APRA’s guidance, introduced in July, to have a minimal impact on overall credit growth, claiming that most borrowers don’t exhaust their borrowing capacity.   

“For loans with relatively low interest rates such as principal and interest loans to owner-occupiers, maximum loan sizes have increased by more than for loans with higher interest rates such as interest-only loans to investors,” the CFR stated.

“In practice, however, only a small share of borrowers take out loans that are close to the maximum available to them, suggesting the overall impact on credit growth is small.”

The CFR’s sentiment is shared by CEO of the Commonwealth Bank of Australia (CBA) Matt Comyn, who previously said that the changes would have a “minimal effect” on credit growth, claiming that “almost 90 per cent of borrowers don’t borrow at the maximum”.

However, speaking to Mortgage Business, CEO of the Australian Finance Group (AFG) David Bailey said the floor rate cuts had removed barriers to credit for borrowers that were lured into the market following the RBA’s interest rate cuts.

Mr Bailey said the floor rate cuts enabled the broking group’s network of loan writers to facilitate access to credit for borrowers that had previously been turned away by serviceability restrictions.  

“Our brokers are reporting that when there was a change in interest rates, it drove a higher level of enquiry but there were some customers who still didn't service under the old benchmark,” he said.

“I think it's had a role to play because those customers who initially enquired have now been activated.”

This was reflected in AFG’s financial results for the first quarter of FY2020 (1Q20), in which the group’s broker network lodged $15.7 billion in home loans, up 11 per cent on the same quarter in 2018.

The improvement in home lending activity is also reflected in the Australian Bureau of Statistics’ (ABS) latest Lending to Households and Businesses data, which has reported a 2.9 per cent rise (seasonally adjusted) in the value of home loans settled in August.

The uptick in August followed a 5.1 per cent rise in July — the largest monthly increase since March 2015.

The ABS also reported an increase in the average loan size, which according to Maree Kilroy, economist at BIS Oxford Economics, is further evidence of the stimulatory impact of APRA’s serviceability changes.

“The two rate cuts in June and July, combined with eased mortgage serviceability guidelines, are opening up credit,” she said.

“We can not only see this in new loan volumes, but also in the average loan size for owner-occupiers, which rose to its highest level on record ($414,007 seasonally adjusted).

“This shows that not only are more people able to borrow for a house, but also that the amount they can borrow has increased.”

[Related: Lower floor rates having ‘small’ impact on demand]