IO lending has ‘much further to fall’

According to the latest Quarterly Authorised Deposit-taking Institution Property Exposures report by APRA, ADIs with greater than $1 billion of residential term loans approved $383.7 billion of new loans in the year ending 31 March 2017. This is an increase of $13.8 billion (3.7 per cent) on the prior corresponding period.

Of these new loan approvals, owner-occupier loan approvals were $249.7 billion (65.1 per cent), an increase of $7.6 billion (3.1 per cent) from prior year. Investment loan approvals were $134 billion (34.9 per cent), an increase of $6.2 billion (4.8 per cent) from the year ending 31 March 2016.

In terms of loan-to-valuation ratios (LVRs), $54.0 billion (14.1 per cent) of new housing loan approvals had an LVR of greater than 80 per cent and less than or equal to 90 per cent, an increase of $2.7 billion (5.4 per cent) from the year ending 31 March 2016. Meanwhile, only $30.8 billion (8 per cent) had an LVR greater than 90 per cent, a decrease of $4.2 billion (12.0 per cent) from the year ending 31 March 2016.

Interest-only loans made up $141.6 billion (36.9 per cent), a decrease of $5.3 billion (3.6 per cent) from the year ending 31 March 2016.

Commenting on the findings, CoreLogic research analyst Cameron Kusher said that the reduction in new lending to higher LVR borrowers is encouraging from a risk perspective with borrowers typically using larger deposits. 

However, he stressed that while the proportion of lending for interest-only purposes has slowed, it has “much further to fall” over the coming quarters as lenders seek to rein interest-only lending in to less than 30 per cent of the new flow of lending. 

“With interest-only lending favoured by investors it may lead to a slowing in demand from this segment. Keep in mind that borrowers utilising interest-only mortgages are assessed on their ability to repay a principal and interest loan. Given this, there is the possibility that the impact on investor demand may be minimal as they choose to just use a principal and interest loan rather than interest-only.

“The data for the March 2017 quarter revealed the ongoing trend as a moderate pull-back in the share of new interest-only mortgage lending however, there will be a lot more work to do for lenders in this space,” he said.

“Investors face a broadening range of disincentives in the market, with mortgage rates for investment purposes up more than 25 basis points compared with their low point last year, record low rental yields and overall tighter credit policies from lenders. Additionally, there seems to be growing acceptance that the housing market is losing some momentum which is likely to further weigh on investor purchase decisions,” he concluded.

Mortgages grow by $107 billion in a year

APRA’s data also showed ADI’s residential term loans to households were $1.51 trillion as at 31 March 2017.

The prudential regulator highlighted that this is an increase of $107.8 billion (7.7 per cent) on 31 March 2016.

Of these loans, $985.8 billion (65.1 per cent) were for owner-occupiers, an increase of $78.9 billion (8.7 per cent) from 31 March 2016.

Meanwhile, investor loans amounted to $528.7 billion (34.9 per cent), an increase of $28.8 billion (5.8 per cent) from 31 March 2016.

ADIs with greater than $1 billion of residential term loans held 98.7 per cent of all such loans. These ADIs reported 5.8 million loans, totalling $1.49 trillion. Of these, the average loan size was approximately $259,000, compared to $250,000 in the prior corresponding period, and $583.3 billion (39 per cent) were interest-only loans.

[Related: Regulatory flux driving down average application LVR]