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Banks warned interest-only loans will irk APRA
The Australian 12:00am February 22, 2018
Michael Roddan
Australia’s biggest banks risk provoking the prudential regulator if a move to attract new interest-only borrowers results in strong growth in sales of the riskier type of loan.
The largest banks in the sector are all well below the Australian Prudential Regulation Authority’s 30 per cent limit on interest-only loans, which was forced on the sector last March.
Lenders were given until the September quarter last year to comply with the rule, which was aimed at reducing the amount of new mortgages going to investors who don’t pay down the principal amounts on loans over time.
But analysts now believe the major lenders will start to drop interest rates to encourage borrowers to take up interest-only loans, having reduced interest-only flow to well below the cap.
ANZ on Tuesday revealed only 14 per cent of loans sold during the most recent quarter were interest-only — less than half the prudential limit. Incoming chief executive of Commonwealth Bank Matt Comyn has flagged the bank’s intention to jump back into the interest-only market. CBA had reduced interest-only flow to 21 per cent of new business. Mr Comyn said CBA “actually overshot” the bank’s preferred interest-only target and ended up in the “low 20 per cent” level.
Westpac, which has close to half of all outstanding loans on its book sold to interest-only customers, reduced its new business flows to 22 per cent. Bendigo Bank sold interest-only loans to 17 per cent of all customers in the most recent quarter.
Rates on interest-only loans have been increased by about 60 basis points on average across the sector, to dampen demand for the product. But in recent weeks, ING, Macquarie Bank and the Bank of Queensland-owned Virgin Money have reduced rates on interest-only investment loans, in a bid to entice more customers. Bank of Adelaide cut interest-only rates by up to 75 basis points, while listed bank Homeloans cut some home loans by 30 basis points. “We see some scope for banks to increase their growth in the profitable interest-only segment,” Macquarie analyst Victor German said. “While this should be of beneficial for all of the majors, in a relative sense it appears ANZ has more scope to grow than its peers.” Morgans analyst Azib Khan said “we would not be surprised to see competition increase in the interest-only space,” with the sector now operating well below APRA’s cap.
This week Reserve Bank deputy governor Michele Bullock warned property investors with interest-only loans, which don’t require any payment of principal for about five years, were the riskiest part of the financial system. With higher lending standards and borrowing limits foisted onto the sector in recent years, there is a growing concern many interest-only borrowers won’t be able to refinance their loan at the end of the five-year interest-only period, and won’t be able to afford the higher principal and interest monthly repayments.
A move by the banking sector to compete for interest-only loans while under such scrutiny risks angering APRA, which criticised the sector when it reignited strong growth in investor lending when it was the subject of a 10 per cent annual growth limit.
APRA was forced to warn the sector “to comfortably remain below” the previously advised 10 per cent growth limit, after the sector began to eclipse it on an annualised basis in late 2016.
