Home loan alert: $140bn mortgage shock looms for Australian economy

Herald Sun February 21, 2018 12:14pm

Jeff Whalley

THE number of Aussie property investors facing a rude shock this year as their mortgage payments spike is much higher than previously thought, a new analysis suggests.

More than $140 billion in interest-only home loans could mature this year, sending a shockwave through the Australian financial system, according to the analysis.

It suggests a rude awakening is in store for Australia’s financially-stretched housing investors as the property market cools.

The analysis indicates the number of investors facing a surge in their repayments this year — as their interest-only periods end — may have been grossly underestimated.

The warning comes after the Reserve Bank yesterday raised concerns about financial stress among investors who took out mortgages at the height of the boom.

Assistant governor Michele Bullock noted many interest-only loans, written before lending standards were tightened in recent years, were soon to mature.

Ms Bullock said some borrowers might “not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage”.

“(This) group might find themselves in some financial stress,” she said.

Figures tucked away in a Commonwealth Bank report — published earlier this month — dramatically reshape the conversation around interest-only loans, according to an industry expert.

They show the CBA alone is likely to have more than $145 billion in such loans on its books, including loans issued to investors and owner occupiers.

The report indicates almost $40 billion worth of those loans are likely to mature this year.

Extrapolating for market share, that means $146 billion in such loans could mature this year across the Australian home loan industry.

Those borrowers would then have to start repaying the principal, refinance their loans — potentially on more onerous terms — or sell their properties to pay off their loans.

The CBA report reveals the bank’s total mortgage book stands at $444 billion, and 33 per cent are interest-only loans.

The industry expert, who asked not to be named, told the Herald Sun it was unclear what proportion of those borrowers were investors or had offset accounts.

Borrowers with interest-only loans typically do not have to repay any of their principal for the first five years.

The report also shows that 26 per cent of the CBA’s interest-only, or ‘IO’, loans will mature this year — some $38 billion worth.

A separate analysis in recent months suggested the value of interest-only loans maturing in coming years — after being issued at the peak of the boom — was far smaller: about $60 billion over four years.

Ms Bullock yesterday said those facing “financial stress” made up a relatively small proportion of borrowers.

But it “will be an area to watch”, she said.

Analysts say home loan customers coming off five-year interest-only periods can face increases in repayments of 30 to 60 per cent as they start to repay their principal.

Property investors were more of a concern than owner occupiers, Ms Bullock said.

 “Investors have less incentive than owner-occupiers to pay down their debt ... many take out interest-only loans so that their debt does not decline over time,” she said.

“Since it is not their home, investors might be more inclined to sell investment properties in an environment of falling house prices in order to minimise capital losses.

“This might exacerbate the fall in prices, impacting the housing wealth of all homeowners.”

Ms Bullock noted interest rates on outstanding variable interest-only loans to investors had increased by, on average, 0.6 percentage points since late 2016.

The Australian Prudential and Regulatory Authority has tightened lending standards in recent years to take heat out of the investment property market, prompting banks to push up interest rates charged to investors.

Among its measures, the regulator last year told banks to limit interest-only loans to 30 per cent of all new mortgage lending by value.

The RBA’s warning yesterday comes as the housing market loses steam.

Figures released earlier this month by research house CoreLogic show house prices fell 0.3 per cent nationally in January, and are down 0.7 per cent since September.