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What effects have macro-prudential measures actually had? And who is the one benefitting?
Back in December 2014, the Australian Prudential Regulation Authority (APRA) asked banks to limit investor loan growth to only 10 per cent. That never happened as growth was over 29 per cent. Then in March 2017, APRA ordered banks to slow interest-only lending to investors by limiting investor growth to 30 per cent of all new mortgages.
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APRA also placed limits on the number of interest-only lending above an 80 per cent loan-to-value ratio (LVR). APRA took these measures as interest-only lending is currently around 40 per cent of all bank lending. APRA is also monitoring high-risk lending including high loan-to-income ratios, high LVRs and interest-only loan periods longer than five years. This increased scrutiny is in response to an environment of high housing prices, high debt, flat wage growth and historically low interest rates.
APRA created a disincentive to write interest-only loans by making banks hold more capital for every interest-only loan made. Therefore, banks decided to pass this cost on to investors to protect margins and shareholders.
This has also been an opportunity for banks to reintroduce a higher interest rate for all investor loans. These measures appear to be having a curtailing effect on investor-led interest-only loans.
In the June quarter of 2017, interest-only loans sat at 30.5 per cent but dropped to a historically low 16.9 per cent overall. The major bank share dropped even more from 48.7 per cent to 16.7 per cent.
The legislation has resulted in many changes including market share for investor loans and made banks a little more creative in working around the issue. Many banks like Westpac and CBA had large investor interest-only loan portfolios that were well above the APRA ceiling.
Demand and market share are changing with the changes to investor loans. Many smaller regional banks and non-bank lenders do not have the large investor portfolios that the majors have. Consequently, they can be very competitive with lower interest rates and higher LVRs for investors, even for those with interest-only loans.
We have seen many banks restrict investor loans to a maximum LVR of 80 per cent. Some non-bank lenders, however, will lend investors up to a 95 per cent LVR for interest-only loans.
To curb this type of demand, major banks have been offering “honeymoon” interest rates to investors who take principal and interest (P&I) instead of interest-only. This is working for banks like Westpac who ensure the P&I option is much cheaper than the interest-only ones.
On average, banks are charging 0.20 per cent more for P&I investor loans and 0.30 per cent to 0.35 per cent higher for interest-only loans — meaning, investors are now paying at least 0.50 per cent more for an interest-only loan.
The cost-effective investor strategy nowadays is to either find a lean regional bank or non-bank lender who has lower margins on investor loans than the majors, lenders like Suncorp, ING and Gateway.
If major banks are what the customer wants, then getting them into two- or three-year fixed interest loan will often get them far better interest rates at 0.50 per cent to 0.90 per cent cheaper than the variable investor rates.
Certainly, the APRA regulations have had a greater effect on the major banks with current investor loans. There are not many existing bank customers prepared to change their interest-only loans to P&I in spite of paying higher interest rates. It seems investors prize the cash flow benefits of interest-only loans above any difference in interest rate.
An unintended consequence has been that regional banks and non-bank lenders are gaining market share as brokers seek value for their investor clients. These smaller lenders have a large scope to do both interest-only loans and high LVR loans without APRA intervening.
CoreLogic cites that Sydney real estate prices dropped by 1.3 per cent in the three months to November 2017.
JP Morgan has stated: “Tighter lending standards have contributed to a moderation in dwelling price growth and turnover.”
It would be a mistake to give APRA this credit as the market has been in a small downturn for the last six months off the back of a considerable property boom and the resultant drop is only applicable in Sydney.
It appears that Australians still have a strong appetite for investing in property and there are still lenders that will freely provide competitive interest-only loans at high LVRs.
