I'll give you a metaphor = cigarettes. This is how I am starting to see interest only lending, the government keeps making changes to discourage it but won't actually take the final leap to cut it out completely.
You have to look back a couple of years to see how we landed in this position in the first place - which is a whole lot of people (voters) whingeing about high house prices in Sydney. The pollies folded and chose to do something about it. So far they've succeeded in slowing the market and appeasing the masses. I'm quietly relieved to be honest bc I prefer a slow, orderly deflation to a crash - which is where we were heading if Sydney and Mel kept going the way they were. What I've noticed towards the end/after booms and it was certainly the case in 2003, was constant doom and gloom about the market and a glut of rental properties eg properties offered with 1 weeks free rent etc. That's repeating itself now. The catalyst that will reverse some of the Govt's sentiment on the tight prudential measures is when vacancy rates start to drop sharply, rents start rising and people complaining about the lack of affordable rentals. I think that will happen and its way overdue, but not before there's some pain in the market ie increased supply of rentals, interest rates ticking up, property values down a few % points and a few bankruptcies here and there. Provided you can survive this period, then salvation will be round the corner.
nothing new really The NAB engine has always been tough on certain types of borrowers, post 90 needed to be super strong ta rolf
Here's the first communication I've received about it. It comes from Advantage, which is NABs second tier funder. No doubt the NAB will make a similar announcement shortly. This actually raises more questions than answers. * How is gross income calculated? Is it only PAYG income and SE income, or does it include rent, dividends, etc? * Is the loan amount inclusive of existing debt or is it new debt only? To me this new policy appears to be a knee jerk reaction to some conversations with APRA and it doesn't appear to be very well through out.
That's because we know prohibition doesn't work. It doesn't work for cigarettes, alcohol, amphetamines & ICE, so it probably won't work for interest only.
It'll be much easier to get a pack of Rollie's if they ban smoking than it will be to lend 500k on interest only if they banned it
LTI 8:1 is pretty generous. I would think it is very hard to get servicing when you only earns $100k pa and want to borrow $800k. Setting the LTI at 8:1 is a bit unnessary given you will get stuck at servicing anyway at that ratio
Unpacking this policy a little - i don't think its that big of a deal and will affect a very small % of applications. Simply, its a creative credit scoring way (computerised) to filter out high risk Interest Only applications. The pricing differential is a far stronger impact. I'd almost go so far to suggest that this is just a catchy way of showing APRA and the world that they are doing something proactively and seeking to lend prudently. Sitting in the bank's boardrooms, i imagine 'perceptions' are also are the name of the game now. They still want to lend, its highly profitable with strong ROE figures, but they need to do so prudently and continually show the regulators that they are taking active steps to improve prudency to lending and I/O. An LTI of 8 is very high. Your literally talking 50% higher than most standard world benchmarks for LTI ratios that are applied in other countries. Its not even close. Further still, their standard servicing calculator does much of the leg work here anyway. There aren't too many standard scenarios where you'd get a servicing pass and go past an 8 LTI ratio. The standard 'LTI's' for normal APRA calculators nowadays is about 6-7 anyway. That is, if you earn $100k gross and your trying to buy a home, your looking at borrowing $600-700k max. Adding rental income and investment income gives you a multiple of 5-6 too. So my summation: This particular change is just to get a headline, appease APRA so when and if they get a smackdown, they can wave this policy around to make it appear like they're trying hard. It will likely weed out a very small % of applications. Wont impact the vast majority borrowers. But it is a neat way of 'trying'. Kudos to the board. Most journalists won't be able to unpick what this actually means, so it'll get the attention they want it to.
