According to Senator Smith, while lenders have been increasingly offering borrowers and small businesses relief packages during the ongoing coronavirus (COVID-19) pandemic, more needs to be done to help investors.
The senator is therefore calling on lenders to switch investors with principal and interest (P&I) repayments to interest-only (IO) repayments, which he said could “be a massive monetary stimulus to the national economy”.
The government whip in the Senate suggested that “billions of dollars” are being funnelled into the banks through principal repayments each year, money which could be used by investors to spend on the economy and reduce rents for tenants instead, he said.
“This simple policy change would significantly boost our economy, which is now on its knees due to the coronavirus,” Senator Smith commented.
“This year alone, it is estimated that around 730,000 interest-only loans will expire, and they will be converted to principal and interest repayments.
“That means these borrowers will have to individually divert thousands of dollars from their disposable income into making principal repayments.
“At the same time, the hundreds of thousands of investors who have been forced into converting their interest-only loans into principal and interest loans over the past few years are also individually paying thousands of dollars in principal repayments,” he said.
“If this forced interest and principal policy were reversed, billions of dollars could become available to give the economy desperately needed stimulus at no expense to either government or the taxpayer.”
The Perth-based Senator also outlined that landlords in Australia would be in a better position to financially assist tenants in a similar way to that in the UK, where investors are no longer paying principal and interest loans and, in some cases, can offer rent-free holidays to their tenants.
APRA barriers should be temporarily removed
Senator Smith noted that the prudential regulator has lifted its hard cap on the proportion of interest-only loans banks are allowed to write, but noted that limitations are still in place (for example, banks are required to hold more capital against “higher risk” loans, such as interest-only loans).
He said: “Giving property investors the option to pay interest over an indefinite period is reverting to a long-held banking policy that was in place prior to 2015, when APRA began to impose tighter lending restrictions to deal with a boom in interest-only loans to investors.
“This policy not only meant investors found it virtually impossible to roll over their interest-only period when it expired, but also that interest rates for interest-only loans were increased compared to owner-occupier loans to slow the growth of interest-only loans.
“There were legitimate reasons for APRA to impose these tougher lending requirements for interest-only loans, because – by early 2017, lending on interest-only terms represented around 40 percent of total residential mortgage lending – a very high share by both historical and international standards.
“However, given the massive hit our economy is taking as a result of the coronavirus, these policies are no longer relevant and are fast becoming counterproductive,” he said.
The Liberal senator for WA therefore suggested that there is now a “very strong economic argument for banks to allow all property investors to roll over their loans to interest-only repayments”, adding that these rates should also drop to mirror the rates for owner-occupier loans.
“This policy would also ensure there are fewer mortgage defaults during the current crisis and underpin the property market,” he said.
“Even the banks’ own data shows that interest-only loans have a lower rate of repayment arrears than principal and interest loans.
“A lot of attention has focused on the sharp declines in the stock market over recent weeks, but they would pale into insignificance if there were a crash in the property market as a result of the coronavirus, because more Australians have their wealth tied up in real estate than the stock market,” he added.
The Senator emphasised that the current value of the Australian property market is more than $7.2 trillion, but the total capitalisation of the Australian stock market is around $2.15 trillion, demonstrating the “profound and negative impact” a major crash in the property market would have on the national economy.
“We cannot allow this to happen, which is why we need to urgently revisit the interest-only policies being imposed on investors by the banks,” he said.
“With the banks recently gaining access to $90 billion of additional liquidity through the RBA at a historic low rate of just 0.25 percent, it is in the national interest that they now allow investors to roll over their loans to interest-only and at a rate comparable to owner-occupiers.”
Broker point of view
The call has been backed by Southshore Finance director and broker Michael Coombes, who told Mortgage Business that while he commended the banking industry for their willingness to “act decisively to assist the Australian community through this unprecedented event”, he suggested that more could be done.
Specifically, Mr Coombes suggested that lenders should be encouraged to automatically extend IO terms on existing loans for a minimum of 12 months, adding that it seemed “ludicrous that lenders are offering deferred repayments to customers to assist through these trying times, and then forcing IO loans onto P&I at the same time”.
“That is just going to result in more people needing to apply for the deferred payment option. There would be a large number of borrowers that could probably continue to meet their commitments if the loan remained on IO,” he said.
Mr Coombes also suggested that extending IO loans for another year could help banks “concentrate their efforts on those customers that need immediate assistance, not those that have been forced into difficulty due to an out of date and out of touch policy”.
The broker also suggested that more IO loans could be offered to new borrowers to help preserve cash flow.
“It would only be fair to expect that a lender would tighten the necessary criteria around this type of loan, but where appropriate, it would be very useful to the borrower.”
The Subiaco-based broker told Mortgage Business: “We have a predominantly self-employed/SME client base that have been severely impacted by COVID-19.
“In the 40 years that I have been in the finance industry, I have never seen an event that has hit so hard, and so quickly. Some of these clients will not recover from this event. Others will be a shadow of their former selves, but others will rebound strongly. Which one is which is the great unknown.”
He concluded that he hoped more lenders would engage with the broker channel to help more customers.
“Hindsight is a wonderful thing, but there has been a large number of inconsistent messages being put out by individual banks, the industry bodies and the government that has led to confusion among bank staff, customers and brokers.
“The unwillingness of the banks to engage directly with brokers to assist the clients navigate their way through the maze has been very disappointing.
“I am sure that if the banks had brought the broking industry under the umbrella, a lot of the mixed messages and confusion could have been avoided,” he said.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.