Powered by MOMENTUM MEDIA
subscribe to our newsletter

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.

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.

Advertisement
Advertisement

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.

PROMOTED CONTENT


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

The Victorian Government will deliver “an historic” $5.3 billion Big Housing Build to construct more than 12,000 new homes throughout me...

A “more optimal” retirement income system would involve retirees “more effectively” drawing on home equity to fund their standard of...

Non-major lenders continue to be the more highly rated lenders used by brokers for both turnaround times and policy, according to the lates...

FROM THE WEB

Join a group of highly informed brokers.

Broker Pulse, a community-driven knowledge base of lender performance Reveal exactly which lenders are making life easiest for brokers and their clients by taking this monthly survey and joining a group of highly informed brokers who leverage these insights every month.

JOIN NOW
podcast

LATEST PODCAST: Responsible Lending - what could lie ahead for lenders brokers and borrowers?

Do you expect to see strong uptake of the HomeBuilder scheme?

Website Notifications

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