APRA lifting IO quotas....

I completely agree, I've said many times that living expense and other policies have the right idea, but need a lot of rationalisation.

I think that will happen, but not in the near future.

 

I dont see how it really changes anything, of itself. The banks already have plenty of capacaity right now to offer more IO volume, as they are below the 30% quota. They are operating at closer to 20% according to @Redom . That means they are able to offer 33% more IO and stay within the previous 30% quota. I suspect the issue for those approaching the P&I cliff is borrowing capacity more so than IO availability.

Remember. If you are an existing borrower approaching the end of 5 years IO and are seeking a 5 year IO extension in order to kick the can down the road and buy yourself some time to avoid the P&I cliff for 5 more years, you will need to service at 20 years P&I and 7% + assessment rate
If you can pass that servicing now, you can get that 5 year extension now. The banks have plenty of quota space.

Similarly, if you are applying for , or soon to apply for new money and will now be seeking 10 years IO instead of 5 years IO in the belief it will be easier to get, you will still need to service at 20 years P&I and at a 7% + assessment rate. If you can pass that servicing now, you can get that loan now. The banks have plenty of quota space.

Those refinancing to a new lender if their current lender wont extend them, will still have to pass servicing as well.... so nothing has changed really.....


As @Redom has pointed out, plenty of borrowers still have plenty of capacity.... but thats mainly P&I borrowers. We all know that as soon you you take on IO debt for 1 or 2 INV properties, it slaughters your borrowing capacity. Thats not because of the IO quota. Its because of the +7% P&I assessment rates.

 

Spot on. All that matters is borrowing capacity and being able to pay P&I to reduce debt and improve said borrowing capacity . You can offer unlimited IO but its meaningless if you cant pass a servicing calc . With the Royal Commission likely to result in the abolishment of HEMs and even more rigourous and forensic scrutiny of living expenses.... this stuff is a side show.

#itstheservicingcalculatorsthatmatter

 

Hmm, not so sure. I wonder if it is more a case of clearing the creek downstream and sounding the flood warning alarm that if need be the gates can be at least partly opened again soon.

It is very easy for the regulators to talk a tough game on the need for prudential responsibility and credit tightening in the midst of a massive property boom, but they are very quick to backpedal when the tide starts to turn.
Last two directives from APRA have been relaxing, RBA talking rate cuts and options for QE, and Sydney is only off 10%!

Another -10% in 2019 and one way or another there will be moves made to free up credit availability even if it is not to previous levels.

 

APRA to remove banks' interest-only lending restrictions - ABC News (Australian Broadcasting Corporation)

As per the article, IO is only 16.5% of loans despite 30% cap so removing this cap is not going to help much at this stage just like removing the 10% cap on io loan growth didnt do much earlier this year.

Unlikely servicing calcs get reverted as it involves proper bank lending standards rather than just cooling the property market.

 

Hmmm slightly different outlook but if this means lenders are more open now to reducing interest only rates back in-line or close to P&I and also more welcoming to Owner Occ on IO...it’s not going to stop the correction but it may add a small speed bump.

How many brokers on here switched O/O to P&I when IO rates changed?
How many brokers on here use to advocate IO on OO when rates were the same. Looking back on Somersoft I would say it was more the standard. Yes admittedly that was due to servicing more than anything but the sentiment was “Why not?, just pay the same amount and put it in offset”.

I personally fit the bill of someone with plenty of servicing and only switched to P&I on O/O because of the rate difference. TBH a lot of people I know did the same...

If rates stay as is then it’s a moot point but I think if they do change it could have more an impact on house prices that some may think.

 

...and so begins the unwinding of much of the last 2 years to rescue the Sydbourne markets..

assessment calcs will be quietly loosened sometime next year also I am sure.

 

And just to follow on, perhaps in time the doors will start to open again to higher LVR’s on IO on OO.

Around these here parts I sometimes feel people forget their are only those that want a PPOR and still have a lot of servicing. These people play a significant role in house prices. When IO on OO went off the table for anything above 80%, whilst technically they have no issues servicing...... a lifestyle of having no smashed avo meant they were not too keen to over extend.

 

I think the main positive to come from this will be the first opportunity the media have had to write something positive for some time.

 

Great points raised @albanga, a few clarifications between what the general media is saying and what APRA really said:

• OO IO is still not appropriate and needs strict controls by banks. This isn't exactly part of the 30% cap, its a general treatment of OO IO loans that banks should apply.
• IO loans above 80% have the same treatment - systemic risk and should be monitored closely.

Both of these were explicitly mentioned in their letter to lenders (the instrument used to express this direction).

The headline has changed for the majority of IO loans (I.e. investors, sub 80%). But there's still a strong focus on the above two types of lending and a general word of warning by APRA to stay diligent here.

So what we MAY see is:

- SVR on INV IO will likely remain as is. Banks are in the business of profit making. SVR falls would lower rates for everyone, they don't want to do that. They've gouged (thanks for the spelling tip!), and they'll keep it that way.

- Discounting for IO INV variable/fixed loans may increase. I.e. we may see some very nice promotional products for investors next year. I.e. investor IO fixed starting with a 3 from mainstream lenders (pretty close to this anyway), and variable IO after discounting a bit above this. This should lower the price of credit for these type of loans and help investors manage their cash flow/rebalance their portfolios back to IO.

 

Is there still a premium being paid for IO?
Will it come down as it was wacked the IO mole 25 basic points if you have IO loan.

 

The other thing we could see is a drop or two from the RBA, which they are already "virtue signalling". I hate how these regulators are controlling the market according to their own individual opinion of what is reasonable - but it has always been thus - just not perhaps so obvious in the past.

Anyway, it is what it is and it cuts both ways. It's hard to see things get so bad as to require QE but if they do then that's exactly what will happen. There would be no reason to be surprised... it's all a game and money is just the creation of man if I remember rightly...

In that event, no doubt APRA would also find other ways to prime the pump, with whatever weasel words they want to attach to unsuccessfully hide the fact that they are just trying to control prices in the housing market.

 

That's not fact. They control other things which have effect on property prices. If they want to control property prices, there are much more effective direct instruments either to discourage or encourage property ownership.

 

a bit too late and too little to make much of difference.

the next thing might be lenders allow borrowers with IO loan to reset loan term, hopefully

 

Hopefully

 

I wouldn’t expect the banks to start running out now dropping IO rates and shouting to the roofs they are open for 90% IO on OO.

I do however believe banks will slowly start to introduce things into the fray. Don’t get me wrong the days of 95% IO on OO will never come back and nor should they.

I will not however be even slightly surprised if we start to again see 90% Capped IO on OO.

But like a child getting in trouble, as soon as Mum and Dad stop watching, they start to again test the waters. Most banks are no different to a child.

 

Yep, I think APRA's next move will be revised guidance regarding expenses verification. To clarify that lenders need only to ensure borrowers can afford their ongoing BASIC expenses as part of serviceability (plus some buffer), and that declared discretionary expenses can be separated out and shaded or ignored for serviceability. To bring some sanity back to the situation.

From my discussions with people in the industry, what is currently happening in loan assessment departments at banks regarding "actual" expenses is knee-jerk madness that is wasting time and killing off a lot of good applications. Apart from putting housing markets at risk of a proper deep crash, the drying up of credit growth will soon start seriously impacting bank profitability. This can't keep up for too long.

 

mortgage arrears increase YoY, plus RC report will be released in Feb, so lending standards will be tighter

They just remove redundant measures that don't play any role now