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Switching from IO to P&I loans may not have desired effect, says bank CFO

Pushing borrowers from interest-only into principal and interest home loan contracts could be a counterintuitive approach to tackling the affordability crisis, the CFO of a non-major bank has warned.

The Reserve Bank of Australia (RBA) recently revealed that borrowers of interest-only home loans could be required to pay an extra 30 per cent to 40 per cent in annual mortgage repayments (or an additional $7,000 a year) upon contract expiry. RBA assistant governor (financial markets) Christopher Kent noted that the increase would make up 7 per cent ($120 billion) of the total housing credit outstanding. 

Speaking to The Adviser, Heritage Bank CFO Paul Williams said: “Regulators are aware of potential risks in the system... Some of the [criticism towards] the banking sector is designed to make lenders more vigilant about validating assessment inputs used to calculate serviceability. 

“If you're giving people more money to buy property, then it obviously inflates property values because they're willing and able to spend more to purchase the property they want.”  

While Mr Kent stated his confidence in borrowers’ ability to manage the rise in mortgage repayments  claiming that many would service their mortgage using savings they’ve accumulated, through offset or redraw facilities, or by refinancing  the Heritage Bank CFO conceded that regulatory scrutiny is likely to increase rather than dissipate. 


“The regulators get worried [when] a borrower can't afford to maintain a repayment schedule and are forced to sell the property at a lower rate, [as it] can have a multiplier effect on broader property values,” Mr Williams said. 

The CFO also noted that commentary from the RBA has been slightly more positive lately despite keeping the cash rate on hold for 19 months in a row (as of May 2018). 

“They have been increasingly vocal about the next move being a rate increase, but whether or not that is an unqualified harbinger of economic growth ultimately underpins why they haven’t made a decision,” Mr Williams said. 

“Rate rises generally reflect positive growth... but in the current environment, [it] will probably also mean a resetting of asset prices.” 

In Mr Williams’ view, the RBA does not want to “undo the current momentum by being overzealous with any rate rises. 

Revelations of inappropriate conduct across the Australian financial services sector brought systemic cultural issues to the forefront of public consciousness, highlighting the need for change to ensure the safety and satisfaction of consumers moving forward.  

While it remains unclear what will eventuate from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, it is likely to have some sort of economic impact, whether directly or indirectly, this financial year and the next, according to the Heritage Bank CFO. 

For example, the major banks themselves claimed that the royal commission is “hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people”, hinting that the revelations are impacting business. Consumer confidence in the major banks has dropped, but Mr Williams pointed out that the upside is Australians are increasingly considering non-major lenders. 

Given the big four banks control more than 80 per cent of all owner-occupied housing loans and 85 per cent of investor housing loans, according to statistics from the Australian Prudential Regulation Authority, Mr Williams said that he hopes “there's going to be a greater political appetite to support some of those smaller players who haven't really had much of a voice”. 

Despite uncertainties, Mr Williams remains positive about the future of lending in Australia, saying that he believes “a customer-owned [lender’s] offering is going to be more competitive in an environment where a lot of the larger players are having to look at their behaviours and their processes”. 

Figures from the Australian Prudential Regulation Authority have already shown that assets held by mutual banks increased, totalling nearly $111 billion for the quarter ending December 2017, which is $7 billion higher than the December 2016 figures.

[Related: Interest-only borrowers face $7,000 mortgage hike: RBA]

Switching from IO to P&I loans may not have desired effect, says bank CFO

Tas Bindi

Tas Bindi is the features editor on the mortgage titles and writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.  

Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business. 

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



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