APRA lifting IO quotas....

APRA to remove IO benchmark - The Adviser

No big deal.... it wont improve anyone's borrowing capacity....

Still, it may improve sentiment among investors a little bit.....

 

IO loan may be treated favourably compared to P+I ?

 

rates on IO might come down a bit

 

IO new lending share is below 20% and has been for a while. Caps been redundant for a while.

Good tool to get structural level of IO debt down though. Unfortunately was a massive bonanza for banks to gauge customers.

 

Now that the restrictions have been removed, what is the incentive for banks to maintain their IO lending cap? It doesn't seem there are any to me.

The article mentions that APRA will review the proportion of IO loans next year and may intervene again should they increase past 30%. What is the point then in removing the restriction? Surely the banks would take the opportunity to increase their business where possible.

All of this seems to provide expansionist environment for housing credit, ergo a rise in housing prices would be expected

 

APRA to remove banks' interest-only lending restrictions

 

Not without a corresponding relaxation of assessment rates and living expenses, and bank scrutiny of said living expenses. IO quotas , as others have stated - have been redundant for quite some time. I have written previously about how they may be relaxed ( I suggested APRA may allow IO volumes to go to 40% for example) but it wont make any difference to borrowing capacity. In fact, if banks start offering 10 year IO terms again , it would actually damage future borrowing power as that debt would be treated as 20 year P&I for future borrowing

The issue is that IO is penalised by todays sensitised P&I assessment rates so having more of it available just hurts you more in the long term...... and with living expense formulas likely to increase further after the Royal Commission releases its recommendations in early 2019, there isnt anything in any of this that improves borrowing power .

Remember, DTI ratios of 6 -7 x income are still the main game.

 

APRA removes interest-only lending cap, says it's served its purpose

The Australian Prudential Regulation Authority has removed the 30 per cent limit on interest-only lending and confirmed most banks have assured it lending standards will be maintained to allow the 10 per cent growth cap on loans to property investors to also be removed, declaring both caps have "served their purpose".

Thoughts on impact?

 

@euro73 - great points on borrowing power. I think your general points about credit restrict a boom from erupting. Without loosened credit it's hard to have a massive drive up in investment lending which drives up prices fast. Its worth pointing out the correlation between credit growth to investors and price rises - there'd be a good link there.

Nonetheless, 70% of all loans don't go anywhere near their borrowing limit. 85-90% still have relatively comfortable servicing buffers too. PC is a very different crowd to the general market.

These stats would be primarily driven by owner occ mortgages which are less volatile than investment lending.

 

I need this. I've been too lazy and my house remains unrenovated. Just 2 more months baby and I'm out!

 

What this policy shift should do is remove the "time bomb" style articles and fear of debt around people being totally unable to refinance IF they have some interest only repayments and want to avoid the total impact of them all switching to P and I at the same time. I am all for paying off debt but let's have some perspective too.

These kind of articles.... fear based ones. This policy change should take the edge off that kind of situation becoming a reality in the market for any significant number of people. Of course there still may be a few in hot water but surely not as many.

Hopefully removes a bit of the fear over time and for those who do service ok, they can at least run a cash flow feasibility for short-term holding costs on an interest only scenario again.

 

It MAY open up the door to banks appropriating a more lenient view on borrowers that are affected by the P&I cliff....to treat them as exceptions (thus avoiding a situation of forced selling and obviously losing their business).

A destabilised housing market is not in the banks best interest.

 

For those investors whose IO expiry is due in next three years,
Can they extend their IO term without going thru current tougher loan assessments?
if they can't then its meaningless from price floor/rise point,
isn't it?

 

YOu have hit the nail on the head. My IO loan with St George rolls over in February 19. It has been 5 years and the plan was to keep it IO for another 5. However St George requires me to complete another almost full credit assesment to prove i can repay the loan in the remaining 20 year period. Under the new assesment criteria I am certain they wouldnt let me do this. The IO cap change is almost pointless without a change in credit worthiness checking process.

 

This isn't going to change anything significant.

Over 8 months ago APRA loosened the reigns on interest only and investment lending if the lenders were able to meet certain conditions. Since then pricing has improved as many lenders try to get more investment lending on their books, but assessment policies haven't become more generous at all (quite the opposite).

Lenders do want to be writing more interest only and investment loans, but they want those loans to be of excellent quality. They're definitely not about to start throwing money around the way they used to.

I also think loan assessment policies are going to get a lot worse before they get better. The Royal Commission report comes out in February. There is no chance that this will say anything good about assessment policy, it will only identify areas of concern or outright problems. Lenders responses to this report will be inherently conservative and probably complete overkill.

 

Gauge or gouge?

 

OK so simple question: what is now left from APRA that limits a bank’s ability to supply IO to customers, apart from the impact to their overall leverage benchmarks / reserves, or royal commission sabre rattling?

Differential pricing for IO and greater servicing restrictions were introduced by banks to meet these restrictions asap - when the trend was for more to come. The knowledge that existing IO customers were now effectively trapped and couldn’t refinance only encouraged their gouging even more.

Now APRA is effectively saying (twice now) that it has gone too far and please re-open the taps - we don’t like where this is going in Sydney. Just goes to show how national policy is made in Sydney for Sydney...

IMO it’s likely to be only a matter of time for the banks to see the open road in front of them again and press on the accelerator once more - after all, it’s good for business...

Unless I’m missing something?

 

On the royal commission and servicing tests, that only goes to show how good the banks are at paying lip service to something while working frantically behind the scenes to increase profit by doing the exact opposite.

There may be a temporary lull in that behaviour but I expect normal programming to resume sooner rather than later. Call me cynical but this royal commission had very little time and a very limited terms of reference for a reason...

 

APRA’s action is like opening the floodgates of a water dam, during a time of drought.

 

APRA seem to have flagged to lenders the RBAs concern they may have taken things too far and they could back off on over emphasis on investor servicing, IO loans etc. Seems its harming the property industry and economy. They finally worked that out......

Excellent summary Peter:

Lets hope thay also adopt a practical measure for servicing calcs too. The notion that UberEats and Afterpay payments harm servicing is going too far.