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Brokers should be ‘proactive’ in refinancing IO clients

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Reporter 3 minute read

Melbourne-based broker Josh Egan says that brokers should be “proactive” and offer refinancing to interest-only borrowers, whom the RBA has said it is keeping “watch” over amid concern of mortgage stress.

On Tuesday (20 February), assistant governor of the Reserve Bank of Australia (RBA) Michele Bullock highlighted the central bank’s concern over the potential financial stress that IO customers may face following the expiry of the IO period.

Ms Bullock said that the central bank was keeping a watchful eye on interest-only mortgagors whose terms are due to expire between this year and 2022, as it fears some may find the “step-up” to P&I repayments “difficult to manage”.

She particularly focused on interest-only (IO) loans and the ability of mortgagors to repay the principal of these loans following the expiry of the IO period.

Noting that “the increasing popularity of interest-only loans over recent years meant that, by early 2017, 40 per cent of the debt did not require principal repayments”, the assistant governor said that “this presents a potential source of financial stress if a household’s circumstances were to take a negative turn”. 

Notably, Ms Bullock revealed that regulators — in the past few years — have been “concerned that lending standards have erred on the more relaxed side”, adding: “An exuberant housing market in some parts of the country and strong competition among lenders raised the question of whether financial institutions had been appropriately prudent in assessing a household’s ability to meet repayments.” 

Adding that controls were therefore brought in by APRA and ASIC to “strengthen mortgage lending standards, she added that credit standards have since tightened and suggested that as a “large portion” of principal-free periods begin to expire, some borrowers may therefore struggle to service their mortgages. 

She said: “[A] large proportion of interest-only loans are due to expire between 2018 and 2022. 

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“Some borrowers in this situation will simply move to principal and interest repayments as originally contracted. Others may choose to extend the interest-free period, provided that they meet the current lending standards. There may, however, be some borrowers that do 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 third group might find themselves in some financial stress. While we think this is a relatively small proportion of borrowers, it will be an area to watch.”

However, speaking to The Adviser on the Elite Broker podcast, Astute Financial broker Josh Egan noted that refinancing options available to interest-only (IO) borrowers could reduce the instances of mortgage stress.

Mr Egan said: “We’ve already been contacting a lot of our interest-only clients and looking to see whether theres an option for them to move into principal and interest.

“I had a client [that] was paying 4.97 per cent on interest-only for his owner-occupier property, [and] we can refinance that to 3.69 per cent, theres nearly 1.3 per cent difference in the rate to move across.

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“So, his actual payments are not going to vary too much at all, even if hes paying principal off.”

The Melbourne-based broker added that with the RBA stating it is keeping “watch” over IO mortgagors whose terms are expiring in the next four years, there are opportunities for brokers to be “proactive” by offering clients with refinancing options.

“Theres definitely a lot of opportunities in that, in the interest-only space [to] make sure that were being proactive because when [IO] was set up, [there was] no difference in the rates between interest-only and principal and interest and now there is,” Mr Egan said.

“[Theres] a lot of opportunity right now in any brokers business to be getting their clients in and having that chat about getting them into something better because theres been a lot of changes in the last 18 months.”

Further, managing director of Market Economics Stephen Koukoulas also alleviated concerns, saying that while there may be a “risk” of mortgage stress, he did not believe it was a “huge one” due to the fact that lending quality has “improved since the GFC and since the [Australian Prudential Regulation Authority’s] regulations have changed”.

“There is going to be a cash flow issue for consumers, for borrowers who are going to be moving into the principal plus repayment schedule over the next year or two, as the RBA pointed out, but it’s a negative for GDP but not a severe one,” Mr Koukoulas said.

[Related: More borrowers consider their mortgage a burden than a benefit]

Brokers should be ‘proactive’ in refinancing IO clients
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