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During a roundtable discussion as part of the Deloitte Australian Mortgage Report 2018 released this week, industry leaders were asked what their biggest concerns were for the mortgage market in 2018.
While prudential policy decisions such as restricted lending and capital changes were the biggest concern, property price reductions in the capital cities were also high on the worry list.
Low ratings were given for interest rate increases pressuring serviceability, but fears over what will happen to interest-only borrowers beyond 2018 began to surface in the discussion.
“I think we all know the cash rate outlook will remain low,” CoreLogic CEO Lisa Claes said. “But we also know that interest rate servicing costs are almost 50 per cent of household debt. So, the sensitivity of that lever is enormous.”
Police Bank CEO Tony Taylor believes that interest-only loans need to be watched carefully over the next two and a half years.
“I expect to see a significant run off in them, not just because of the regulatory changes, but because you won’t be able to refinance in the interest-only category,” Mr Taylor said.
“If you go from interest-only to P&I (principal and interest), it’s potentially up to a 40 to 50 per cent increase in the servicing costs.
“In two years to three years out, there will be quite a diﬀerent outlook from what’s there now.”
ING’s head of retail, Melanie Evans, believes that APRA’s demand for more information around serviceability and a borrower’s ability to repay debt under P&I and interest-only loans may shift the focus from a “black-and-white” category definition of serviceability to a detailed look at its underlying serviceability.
“This will be a combination of rate, P&I versus interest-only and a range of other things. So, the prudential regulator has signalled its focus on aﬀordability and serviceability, not rates.”
HSBC’s Alice Del Vecchio warned that servicing issues for interest-only loans will depend on how and when the loan was on-boarded.
“It comes back to how you assessed the loan in the first place and how much of this type of lending was done. This means the issues on interest-only loans are likely to be bank-specific,” Ms Vecchio said.
Earlier this year, APRA announced the removal of its 10 per cent benchmark on investor loan growth, which has been replaced by a more fundamental tightening in lending standards including around interest-only lending (last year) and tougher requirements around borrowers’ income and expenses and going forward around total debt to income.
CoreLogic’s Lisa Claes said that while she agrees with the regulator in principle, it can create undemocratic outcomes for consumers in the broader market.
“It is very hard for the participants as it can translate into an individual response such as: ‘Sorry, Lisa, as you are the Xth investor borrower in 2018 and we’ve just hit our ceiling, we can’t lend to you.’ To me that doesn’t make sense. I don’t know what better way granularity can be achieved, other than more insight into your customer base or potential base? Can ADIs use data to more democratically cherry-pick their existing and potential borrowers?”
The Deloitte report found that 60 per cent of Australia’s leading financial services mortgage lenders and brokers predict housing settlement volumes to decrease by up to 5 per cent in 2018, with a further 20 per cent expecting them to remain flat.
It also found that the opportunities in the sector will be taken by refinancers and increasingly by first home buyers. Investor and interest-only loans will drag back to long-term levels, and owner-occupied principal and interest (P&I) borrowers will continue to use the low interest rate environment to build up equity against their mortgage.