No more interest only MortgagesInterest no longer only mortgages
The RBA warned against the dissolution of interest-free housing lending, which can cause distress and affect fiscal sustainability.
Reserve Bank has cautioned that a surge of mortgages selling only for interest rates when the standard was looser and would run out in the next four years could put borrower under strain. The RBA says that many investor will fight with only interest-bearing debt to comply with more consistent credit ratings when their existing arrangement runs out in the next 4 years.
At the Responsible Crediting and Borrowing Summit in Sydney, RBA Deputy Gov. Michele Bullock said that investors' credit granted prior to the introduction of a stricter regulation regime in recent years had been carefully supervised to make sure it did not affect overall fiscal sustainability. "We still have a large amount of residential construction debts, some of which are unlikely to match the more restrictive credit ratings currently being imposed," Ms Bullock said.
Mrs Bullock said that the high share of pure interest rate debt expiring between 2018 and 2022 was of particular interest. For the most part, the borrower will easily switch to repayment of debt and interest as initially agreed, while others may opt for an extension of the interest-free term if they comply with existing credit standard.
"However, there may be some borrower who do not comply with the present credit standard for the extension of their pure interest payments, but would find the rise to capital and interest payments hard to manage," Ms Bullock said. "The third group could get into trouble financially. "Although we think this is a relatively small portion of borrower, it will be an area to observe.
" Mrs Bullock noted that, while the action taken by APRA and ASIC to reinforce mortgages credit standard in recent years has contributed to improving the credit provided environment, the effects of declining home values remain a major source of insecurity for overall fiscal sustainability. Investors were particularly affected, with high loan-to-value ratio (LVR) and little stimulus to repay debts.
According to APRA and RBA data, by the end of 2017 around 40 percent of mortgages still had to be repaid, while the debt-equity gearing had increased from 120 percent five years previously to 140 percent. "Therefore, if property values were to drop significantly, such borrower (with high LVRs) could be in a worse capital loss situation more quickly than borrower with an equal initial LVR who had already repaid part of the capital," Ms Bullock noted.
Considering that at a time when property values are declining, an investor is more likely to be selling his property to minimize the loss of equity, Ms Bullock said that this could quickly be reflected in the overall economic picture. "Mrs Bullock saw the home ownership industry in the markets much more cheerfully, despite increasing indebtedness of households.
"If we look only at owner-occupied homes that have mortgages, the poll indicates that the average residential indebtedness rate has increased continuously over the past ten years, reaching around 250 percent in 2016. "Whilst indebtedness is relatively high and there are self-help homes under pressure, this group is currently not expanding rapidly," Ms Bullock said.
"Given the current level of consumer mortgages distress, this indicates that the risk to banks and broader fiscal instability is not particularly high."