In March, APRA announced that interest-only lending would be limited to 30 per cent of new home lending for ADIs.
Vow Financial’s Clive Kirkpatrick this week explained that the industry is currently running at approximately 38 per cent of interest-only lending: “so a significant pull back, in the order of 20 to 25 per cent, is required to achieve this goal.”
“It is therefore reasonable to expect to see a number of rounds of changes across all lenders before this limitation is met. There are two key words in the previous sentence, that being number and all,” Mr Kirkpatrick said.
“In terms of predicting the number of changes, from an individual funder’s perspective, it is difficult to be able to gauge the exact policy change required to achieve the required result – especially when the rest of the market is changing policy at the same time,” he said.
However, the former St. George third-party boss said it is reasonable to expect that changes will flow through the industry and have a knock-on effect.
“A major may make a significant policy change, other lenders will follow suit or make different changes, these will ‘bed in’ and then further adjustments may be required, creating further ripples through the industry,” he said.
Non-banks not unscathed
Mr Kirkpatrick stressed that all lenders will be impacted — not just the ADIs that APRA regulates.
“It is true that APRA does not regulate all lenders in the industry, however, there is no question these changes will also impact non-bank lenders,” he explained.
“Those who may use securitisation are absolutely impacted by what the rest of the industry is doing, either directly or indirectly.”
Last month APRA chairman Wayne Byres outlined how the regulator will avoid the spread of “high risk” loans to non-banks by ramping up its supervision of major banks’ funding lines.
Mr Byres told attendees at the CEDA 2017 NSW Property Market Outlook event in Sydney that there are “credit providers beyond APRA’s remit” and “a tightening in one credit channel may just see the business flow to other providers anyway.”
“Of course, lenders not regulated by APRA will still provide competitive tension in that area and it is likely that some business, particularly in the higher risk categories, will flow to these providers,” he said.
“That is why we also cautioned lenders who provide warehouse facilities to make sure that the business they are funding through these facilities was not growing at a materially faster rate than the lender’s own housing loan portfolio, and that lending standards for loans held within warehouses was not of a materially lower quality than would be consistent with industry-wide sound practices.
“We don’t want the risks we are seeking to dampen coming onto bank balance sheets through the back door.”
In addition to regulatory pressure on their funding lines, Vow’s Mr Kirkpatrick explained that the knock-on impact of 90 per cent of the mortgage market looking to reduce interest-only lending by around 20 per cent.
“The indirect impacts are huge for the remaining 10 per cent or less of the market,” he said.
“Initially the non-bank lenders may be able to take up some of the slack, but the overflow from the regulated lenders will soon exceed capacity of these lenders.”