The value of loans approved outside of serviceability has tripled to a whopping $4.3 billion in just 12 months, which is a “potential area for concern”, according to analysts.
Cameron Kusher, research analyst at CoreLogic, has highlighted data released by the Australian Prudential Regulation Authority (APRA) showing that macro-prudential tightening is “clearly having an impact on riskier types of mortgage lending”.
The latest quarterly property exposures data for ADI released by APRA shows that, over the March 2018 quarter, there was $86.75 billion in new mortgage approvals to ADIs.
This figure was 13.5 per cent lower over the quarter and 2.8 per cent lower year-on-year.
The data found that new mortgage approvals were at their lowest level since March 2016, largely driven by a fall in the value of lending to investors and owner-occupiers.
Year-on-year, the value of lending to owner-occupiers was 3.9 per cent higher, while lending to investors was down by 15.3 per cent.
Over the March 2018 quarter, 15.7 per cent of new lending was for interest-only loans. However, the value figure for interest-only loans came in at $13.62 billion, the lowest quarterly value any time over the past decade.
Notably, however, CoreLogic highlighted that the value of lending for “non-standard loans and loans outside of serviceability” had increased sharply over the past year.
The APRA statistics show that the value of new residential term loans to households that were approved outside of serviceability (i.e. they did not meet standard serviceability/lending criteria but were approved nonetheless) increased from $1.46 billion at the quarter ending March 2017 to $4.29 billion at the quarter ending March 2018.
APRA acknowledges in its Prudential Practice Guide APG 223 that “overrides are occasionally needed to deal with exceptional or complex loan applications”, and could include loans where the borrower is assessed to have a net income surplus of less than $0 (even if temporary) or where exceptions to minimum serviceability requirements have been granted, such as waivers on income verification.
Mr Kusher echoed concerns made by Digital Analytics principal Martin North about the rising proportion of loans falling outside of serviceability.
The analyst said: “Year-on-year, there has been a fall in low documentation and other non-standard lending while there has been a substantial increase in loans approves outside of serviceability (+193.7 per cent).”
However, Mr Kusher noted that while loans approved outside of serviceability have increased year-on-year, they remain a small part of overall lending (5.3 per cent) as do low documentation (0.3 of a percentage point) and other non-standard loans (0.1 of a percentage point).
The share of lending on high loan-to-value ratios (LVRs) also dropped in the March 2018 quarter, with just $17 billion (approximately a fifth of total lending) going to loans with an LVR of more than 80 per cent. This was the lowest share for its kind on record, the analytics firm found.
Speaking of the figures, Mr Kusher said: “The data released from APRA highlights how the lending policies currently in place are resulting in fewer investment and interest-only borrowers, general reductions in non-standard mortgage types and a reduction on higher LVR lending.
“A potential area for concern is that the value and share of loans approved outside of serviceability is somewhat elevated compared to historic levels.
“With macro-prudential policies remaining in place and the potential for additional policies, such as limits on debt to income potentially to be implemented, it is pretty clear that taking out riskier mortgages is becoming less commonplace.”
The analyst continued: “This should help to somewhat future-proof the housing market in the event of future shocks, and the focus on principal reduction should help to stall or reduce the record high household debt burden.
“Of course, dwelling values are now falling in the two largest markets (Sydney and Melbourne) and the real litmus test for the prudential oversight will be whether or not loan quality is maintained as values fall and whether or not mortgage arrears climb.”
Despite the concerns being raised about loans being increasingly hard to service, the RBA has said that it expects any further tightening in credit conditions to be “modest”, and some of the industry’s most successful brokers have told The Adviser that while the environment has become extremely tough, they believe the credit squeeze will be short-lived.
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