IO Loans close to 30% threshold

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Hopefully this link works on desktops. New lending is currently at 30.5% IO which is very close to the threshold of 30%.

Do you think we'll see the banks relax their lending conditions a little once they reach the threshold, or do you think the current conditions will hold firm and become the new norm?

 

APRA may push it lower yet. Its like monetary policy but in place of using interest rates you use quantitative means such a lending caps and stricter servicing tests. They can make it up as they go based on the economy. The slow drag of OTPs completing needs to be watched. SE QLD hasnt slowed enough either

If I was betting on it I would bet for further limits on IO especially if the borrower has any IPs. Some lenders are still allowing IO renewal with limited servicing review.

 

They can't really relax it, as someone said it's a max speed limit. Some might relax interest rates a wee bit, bit I believe the new finance cap also includes renewals so I think IO loans are going to remain quite tough to get for the foreseeable future. Banks like NAB that were closer to the cap to begin with might have some more wiggle room, where others like Westpac (which was hovering around 50 or 60%).

If you look through the linked report, too, IO lending is still at a record high overall. The cap is just on new finance. APRA wants the total volume of IO loans to also drop, so I think there's very little chance of them relaxing the policy until that happens. IO loans as a total share have gone from about 30% in 2012 to pushing 60%, so they grew very quickly. I think the speed at which new finance for IOs is dropping might hopefully mean APRA won't take other or quicker measures to bring down the total, which it has hinted it's willing to do.

 

I don't think there'll be a relaxation in this policy over time, but i do think it will matter less as the market will self adjust below this upper threshold. IO lending above a certain percentage (arbitary) doesn't make sense from a financial stability perspective, it just took a while to address with a hard cap policy. Hard cap policies aren't exactly ideal, its a number plucked out of thin air and then 'justified'.

Its one area where i imagine there'll be a more concerted & ongoing regulatory effort.

The difference is, when the investment market is hot & pricing of IO loans are equal, than IO will be the preference and make up a significantly larger % than 30%. As the market changes & there's pricing differentials, i suspect that over time there'll be an adjustment back below 30%.

In terms of impacts on investors, you can already see that banks are now working backwards to reduce the pricing gap between IO & P&I. It rose to above 1% for certain loan types & will now revert back closer to ~0.5% i'd imagine as banks come crawlling back to that 30% figure.

From a policy perspective, IO restrictions is actually a very clever way to manage risk in lending markets too. Incentivising a shift back to P&I has two impacts:
- Natural deleverage associated with people paying down debt they already have.
- Reduces multiplier impact of having larger & riskier portfolios built, P&I = higher repayments = lower overall investment sized portfolios being built via lender swapping.

 

You forgot to mention how profitable the current environment for I/O loans is. I've ready that an I/O loan is currently around 40% more profitable for a bank than P&I. Perhaps I'm just a cynic.

I do agree that there won't be a significant relaxation of policy. Some minor tweaking at the edges, but nothing that's going to make a significant difference. During the GFC a lot of policy changes were made that had a significant impact on lending habits. Most of those changes are still in place today, almost a decade later.