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Towards the end of 2016 a number of economists flagged the possibility of tighter lending curbs following a resurgence in investor finance activity.
Speaking to Mortgage Business, Property Investment Professionals of Australia (PIPA) chair Ben Kingsley said the regulators are “definitely inside the banks”.
“They are definitely looking at what’s going on around interest-only lending. That is probably their next area,” he said.
“They are sort of trying to understand why households with owner-occupied properties are using interest-only loans.”
According to Mr Kingsley, a sophisticated household may choose to use an interest-only mortgage for their principal residence with an offset account.
“Ultimately, we want the household and the investor to be in control of their cash flows,” he said.
“We think it is a premature move by the regulators, if they do tighten up on this, because it basically means that they don’t understand that the market is getting more educated on their options around how they manage their cash flows.”
Opportunities for alternative lenders
The mortgage market continues to adjust to the new regulatory landscape. Mr Kingsley says that APRA’s 10 per cent cap on bank investor loan books has forced them to ‘squeeze’ investors.
“If we look at the consequences of this market intervention and manipulation by the regulators, what we have seen is because the banks have a cap on their investment lending, they can’t grow profits by volume. So what they have had to do is try and grow it by margin,” he said.
“They tried when interest rates were dropped by not passing on the full RBA cut to owner-occupiers and investors, and they got smashed by the government. They got called up to Canberra to explain why.
“The less politically sensitive way to get margin is to then squeeze the investor. That has what we have seen in increased margins for investment lending.”
But according to the PIPA chair, this only creates opportunities for alternative lenders to potentially offer investors a more competitive rate.
Melbourne-based broker Mark Davis from the Australian Lending & Investment Centre (ALIC) recently told The Adviser’s Elite Broker podcast that non-banks’ pricing and rates have become more attractive in the last six months.
About 90 per cent of Mr Davis’ business comes from property investors. He noted that his own business has been “forced to become more rate-driven” to appease clients, and that the brokerage has been sharing “a huge amount” of loans with non-bank institutions.
He said the emergence of these non-banks is “fantastic” and that the choice to write loans with these lenders is down to a number of factors.
“The service levels can be stronger through the non-banks, the rates are better and we can have better communication,” he explained. “That’s what we need, as a business, to write the volumes we do.
“If we’re getting that from the second-tiers and the mortgage managers, that’s gold.”
[Related: APRA taps banks for more mortgage data]
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