Powered by MOMENTUM MEDIA
subscribe to our newsletter
RBA report exposes key lending risks

RBA report exposes key lending risks

The Reserve Bank of Australia has published a first-of-its-kind report on the Australian mortgage market that reveals troubling details of inherent market risks.

The report analysed a sample of approximately 72,000 home loans between late 2009 and early 2014 and found that borrowers with a higher LVR loan were more than three times as likely to fall behind in their repayments.

Around 1,300 of the loans analysed (1.8 per cent) were in arrears by more than 90 days at some point in the sample.

Advertisement
Advertisement

However, a loan with an LVR at origination of between 90 and 100 per cent has an estimated subhazard of entering arrears that is about three and a half times that of a loan with an LVR less than 60 per cent, the report found.

“Additionally, the subhazard of entering arrears appears to increase non-linearly, and is particularly high for loans with an LVR between 90 and 100 per cent; a loan with an LVR at origination of between 80 and 90 per cent has a subhazard of entering arrears that is about 1.1 times higher than that of a loan with an LVR between 60 and 80 per cent, but a loan with an LVR of between 90 and 100 per cent has a subhazard of entering arrears that is almost twice that of a loan with an LVR between 80 and 90 per cent,” wrote RBA officials Matthew Read, Chris Stewart and Cianni La Cava.

Released Tuesday, Mortgage-related Financial Difficulties: Evidence from Australian Micro-level Data is the first paper to use micro-level data to quantitatively analyse mortgage-related financial difficulties in Australia.

It found evidence to suggest that both ability-to-pay and equity factors have significant correlations with the incidence of mortgage stress.

In addition, the report established that while interest-only loans are less likely to enter arrears, slower repayments mean that an increase in interest-only loans can “represent an increase in risk”.

Low-doc loans are more likely to enter arrears than other types of loans, even after controlling for whether the borrower was self-employed, the report found.

“This suggests that lenders should maintain sound income documentation and verification policies, and that supervisors should continue to monitor developments in the low-doc lending space,” it said.

The RBA believes the findings could be used as an input into stress tests of the home loan exposures of Australian banks and mortgage insurers.

The central bank believes it could also be useful in informing decisions about the design of the prudential policy framework.

“More broadly, the information could help to inform decisions about the level of risk that lenders, their investors and regulators are willing to accept,” the  RBA said.

RBA report exposes key lending risks
mortgagebusiness

 

Latest News

Ahead of Parliament returning next week, Prime Minister Scott Morrison has conceded that Australia is facing “challenges and headwinds” ...

Slater and Gordon has filed a class action against AMP claiming compensation for more than 2 million people it alleges have been charged ...

An aggressive monetary policy strategy employed in response to rate cuts in foreign markets would be a “dangerous path to go down”, Rese...

FROM THE WEB
podcast

LATEST PODCAST: Broker share and Westpac U-turn

Do you think the banking royal commission recommendations could negatively impact competition in the mortgage market?

Website Notifications

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