Interest-only home loans a ticking time-bomb, warns UBS

Maybe so, but are there concerns pure BS without any merit?

 

wasn't the topic IO loans and their understanding?

 

The concern is based on flawed reasoning. The concern may have merit, but if its based on flawed reasoning you cant quantify it. North korea nuking something is a concern. Does that mean we should all buil bunkers? How likely is it? You need good information and reasoning.

For example i think most people dont know the terms and rates on their credit cards. Does this make credit card debt more risky for banks?

 

Risky no,
but peoples ignorance makes CC very profitable for banks.

 

So wheres the time bomb from people not knowing they have interest only loans?

 

I repeat knowing you have an IO loan and fully understanding what it means for your future repayment are two different things.

I don't know if it's a time bomb or just a fart, but looking at APRA sudden jihad on IO loans its seems plausible that IO loans are indeed a serious risk in the eye of RBA.

 

The claim is that...

"Up to a third of borrowers with interest-only loans may not realise they have them, UBS has warned in a stunning finding from its survey of recent borrowers.

If a borrower reads and understands their bank statement they will see that every month their balance is exactly the same. I accept that some people do not do this but one third of all interest-only borrowers? Sounds like BS to me.

Anyway, @AlexV_Sydney already figured out their methodology is flawed. He's right.

Have a look at how they compiled the data:

The anomaly was that the bank regulator APRA's data showed that more than 35 per cent of new loans over the past year had been interest-only, but only 24 per cent of survey respondents told UBS they had taken out an interest-only loan.

Let's say I refinanced and took out 3 I/O loans. Another person bought a PPoR on P&I and another person bought a PPoR I/O without knowing the loan is I/O.

There are 3 borrowers and 5 loans.

80% of the loans are I/O but only 30% of the borrowers know they have an I/O loan.

This is clearly a flawed methodology.

 

Well, that's not really correct. Have a look at the directions to lenders from APRA:

As detailed in this letter, APRA expects ADIs to:
* limit the flow of new interest-only lending to 30 per cent of new residential mortgage lending, and within that:

- place strict internal limits on the volume of interest-only lending at loan-tovaluation ratios (LVRs) above 80 per cent; and
- ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent;​

* manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth;
*review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and  continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans and loans for very long terms).
​

http://www.apra.gov.au/adi/Publicat...nd residential mortgage lending practices.pdf

30% of new residential mortgage lending as interest-only is hardly a jihad.

 

Prior to crack down IO loan was around roughly 43% of loan book, so to reduce it to 30% from 43% is a significant reduction in percentage terms. Besides what makes you think APRA is going to stop at this?

 

To be brutally frank, it would not surprise me if quite a number are totally unaware of possible implications of IO loans. It always astounds me how some are oblivious to the bleeding obvious ranging from CC debt, mobile phone plans, to the disastrous Managed Investment Schemes. The list goes on. No idea why some are that way, they just are I guess.

 

Yep, and with the difficulty in refinancing this might impact demand

I disagree with the flawed methodology as results are controlled for average loans.

So while you might have an outlier which skews results - it wouldn't be material.

 

Something is causing sales volume to be 40% down in last 12 months!

I think interest only tightening has had an impact .. . We will see as more of these roll over...

Price follows sales volume . . . sales volume is down markedly this year...

Just data and charts . . . join the dots for yourself

 

"to reduce it to 30% from 43% is a significant reduction in percentage terms"

Yes it is, but a) the measure is entirely sensible and b) by no means can be considered a "jihad".

> Besides what makes you think APRA is going to stop at this?

I don't think APRA will stop at this a I don't think they should. But you can't claim "jihad" on something might do in the future.

 

Interesting chart. Where did the data come from? Did you create the chart yourself?

One mistake I have made in the past is looking at sales volume too early (when not all sales have been accurately recorded for the most recent time period).

 

Are you stuck on the word Jihad?

so Instead of APRA's jihad on IO,
lets call it APRA's light smack on the back,

 

Would you agree on significant reduction? It seems to me that APRA is acting before I/O loans become an issue rather than acting because I/O loans are an issue. People winge when people claim that Australia is different, citing the USA and Ireland as reasons why the Oz market must crash. I haven't seen any articles examining the role of regulators and what actions they took ahead of the markets going to hell.

 

This ^^^^^ and that (below)

 

Someone concludes this every quarter - ABS prelim numbers are always record lows, then revised up next quarter.

 

Source?

This might have something to do with it (the article is from 2015 probably even higher now in 2017)
The typical home in Australia is now owned for 10.5 years
"Across Australia, homes are being owned for longer, with the average number of years a capital city house is owned climbing from 6.8 years a decade ago to 10.5 years".

No doubt the high transaction costs probably have a lot to do with this trend!

 

Sourced from UBS using CoreLogic data.