Bank casts doubt over borrowers 'reclassifying' mortgages

By James Mitchell

02 August 2017

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A global investment bank says it “would not be surprised” if Australian borrowers are reclassifying their mortgages from investor to owner-occupier in an effort to avoid paying higher rates.

In its latest Australian Banking Sector Update titled Are Owner-Occupiers Filling the Investor Housing Gap? released this week, UBS notes that, in recent months, investment property lending (IPL) has slowed while owner-occupier lending has accelerated.

However, the report’s author, Jonathan Mott, says that the slowdown in total housing lending has been much more muted, bouncing between 0.50 per cent and 0.55 per cent per month.

“This implies owner-occupied (OO) lending is filling the gap left by IPL,” Mr Mott said. “Given first home buyers are still near record low, this implies a rapid acceleration in 'upgraders' purchasing bigger homes.”

Mr Mott believes that the trend could also indicate that some investment borrowers are "telling their lender they intend to occupy the property to benefit from lower interest rates."

“While it is plausible that there has been an increase in upgraders," Mr Mott says, "we would not be surprised if borrowers are tempted to apply for or reclassify themselves as owner-occupiers given the ~60bps differential in interest rate between OO and IPL.

“This is consistent with our Evidence Lab report, which found 28 per cent of mortgagors stated their application was not factually accurate—32 per cent via brokers.”

Late last year, UBS Evidence Lab surveyed 1,228 Australian who had recently taken out a mortgage. Only 72 per cent of them said that their application was “completely factual and accurate”.

Mr Mott called the findings “disturbing” given high levels of household indebtedness. The report, which was released on 6 October 2016, put debt to income at 186 per cent.

Reserve Bank governor Philip Lowe has since made repeated warnings about Australia’s debt-to-income ratio, which is currently hovering at a record high 190 per cent.

In its latest Financial Aggregates, released this week, the RBA notes that the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $55 billion over the period of July 2015 to June 2017, of which $1.3 billion occurred in June 2017.