Lending to become easier for Investors for the first time in 5 years

It didn't take too long before some of these sentiments are hitting mainstream media, Macquarie economists noting that there's an increased chance of credit loosening as the CFR look to take action.

Interestingly, the article comments on a few of the potential options APRA have (similar to this post). Personally i think the assessment rate change will be a down the track measure that they'd apply after loosening other screws first. Its kind of a 'tap' situation, they can increase the flow of lending with more aggressive measures (which assessment rate changes are), but begin with smaller changes.

https://www.smh.com.au/business/ban...-on-loan-curbs-macquarie-20190121-p50sq6.html

 

Hi @Redom , which year was assessment based on buffer rate (is it 3% now?) on top of mortgage rate was introduced by lenders?

I think the servicability impact of disparity in whats one 'claims to spend' on loan application and what one 'really spends', may be quite significant. Just as significant if not more then the impact of buffered assessment rate.

just curious when did banks start the close scrutiny of expenses like they are doing currently?

 

It must be about 12 months now since this kicked in, perhaps it started to creep up from 2017

 

Thanks for the link @Redom

"
However, they said APRA could "sensibly justify" that a 7 per cent minimum interest rate was now too high, because banks had tightened up their assessments of mortgage customers in other ways, adding that a 3 percentage point hike in interest rates appeared "extremely remote."

The economists said the hurdle for APRA lowering this interest rate floor would be "high" and they therefore did not expect such a change "anytime soon"."

Talk about hedging your bets though, Fabo and Deverell feel that APRA can sensibly justify the drop but the hurdle is high so it won't happen soon. Lol

 

Fabo's ex-RBA & sharp as a tack: guess it's a none-too-subtle nudge in APRA's direction

 

Assuming buffered assessment rate has been in place for lot longer then past 12 months,

The start of expense scrutiny at micro level coincides with with the start of meaningful falls in frothy segments? Put 2018s IO2PI rollover of 100bn in equation and it gets interesting.

 

Expenses scrutiny really became widespread and very intense immediately after it was brought up the royal commission last year. Loan assessment timeframes also blew out because of it which probably caused a material number of purchase contracts to lapse and also scare borrowers off .
I agree it's probably been a major factor in frothy market falls.

 

There is sense to what Macquarie is saying RE assessment rates and the likelihood of a 3% increase in rates. Of course rates will probably increase by 3% or more over the life of a loan, but one only needs to be concerned about a significant rise (let's say 3%) occurring early in the loan term. After say five years into a 30 year loan (assuming P&I) the principal has reduced 8% and borrower income has increased roughly 13% (CPI), such that the same interest rate increase has less impact on a borower's capacity to repay than it would at the start of the loan. I would agree that a 3% increase to variable rates within the next five years is quite remote.

And therein lies another other risk factor associated with IO-heavy loan portfolios. Maybe there should be different minimum assessment rates for P&I and IO to reflect this different risk profiles - let's say 6.5% for P&I and 7% for IO? This is easier for APRA to justify.

 

And as far as the IO cliff goes, just reset everyone who needs it to 30 yrs P&I (only once per loan)

If they still can't afford it after that, then they need to sell down. Otherwise, noone loses. Crisis averted.

 

Why?

We are in an environment of rising global yield to attract foreign capital, 40% of our loan books are funded by international money,
USD libor is rising fast its close to 3.2% which effectively decides the fx swap rates,
Our base rate is now lower then USD libor rate (Its been few decades since this happened last time?), Our IRs has to be attractive to foreign capital to get their capital, don't you think?
So why is 3% IR rise in next 5 yrs such remote scenario?

My point is, Irrespective of what RBA does can our mortgage rates remain low?

@petewargent @Redom @euro73

 

Speculators bailout?

 

Seriously you are like a broken record with the IO to P&I
Buffered rate has been in for many many years
Your'e going to have to wait for a world event to get your bargains wiggle, hoping you'll get them on the IO to P&I won't happen

 

Maybe time to panic if losses get up around the 25-30% mark , but every year I get to claim a deduction on my losses against general income , many investors take it one step further and go IO only, up until recent times their monthly repayments were significantly lower , most owner occupiers dont get that , so I really dont see why some want more favourable treatment.
One of the original reasons for negative gearing many many years ago was to help out property investors during the bad times.
This was in an era when the overall market made small profits during periods of lower interest rates and losses when interest rates went up.

 

I guess I am not confident as you are that it is a non issue.
Albeit I am getting more and more inclined towards it being far bigger issue then general consensus here on PC.

The way its heading we may not need a world event to get a 25% bargain by 2021,
but if there is an world event ....then all bets are off.

 

Bear in mind though that the previous USD LIBOR peaks are roughly 5.5% pre-GFC as shown on that chart, and USD LIBOR rates typically hover within 1% of the Fed rate. To increase another 3% from current levels, LIBOR would have to exceed that previous pre-GFC peak, meaning either the Fed doubles rates or USD LIBOR has a major break away from the Fed rate. Unlikely but not impossible within a 5 year timeframe IMO. I think we would be looking at significant inflation scenario for this to occur, in which case wages are probably inflating also in Australia which ameliorates things a little.

As you've said, overseas funding only make sup ~40% of Aus major bank loan books, so increases to LIBOR etc has a diluted effect on their funding costs.

And finally, if all the above worst case did happen or was exceeded, the RBA would drop the cash rate anyway to counteract these overseas funding costs, because they know that a 3+% increase to mortgage rates, almost doubling what most people are already paying, would brutal for households and the domestic economy.

 

You can always hope

 

What was RBAs rate then? its was close to 6.5-7%,
historically RBAs rate hover over libor rate 1% or so,

RBAs rate now is 1.5 and libor close to 3%,
keep in mind this rate is THE reference point for global bond market, When expiry is due can our lenders find buyers interested at such low rates given that FXswap rates have risen?

let me ask you this way, you might have heard of banks margin under pressure, why is that if RBA has kept its IR steady?
why have banks albeit slowly started raising IRs even at the risk of loosing market (was it ubank and some other?)

 

'you may say I am dreamer', ....wait a min
the falls are real... that's a fact,
its gaining momentum... that's a fact,
and there is nothing suggesting its going to slow,
so may be... just may be... its not hoping.. its happening...

if anything 'this fall is going to come to an abrupt end' is hoping,

 

Yep LIBOR is putting pressure on aus bank funding costs and margins, which will flow through to mortgage rates. But not to the extent of a 3% increase to variable mortgage rates in the next five years, this would need to be a notional 7.5% increase in LIBOR at current 40% overseas funding makeup.

Recent and predicted out of cycle bank rate hikes are still well within the safe zone of what households have capacity to repay. With the cash rate this low, the RBA will not drop it until it has no other choice.

At least that's my best guess.

 

From APRA

Interest rate serviceability test whereby assessments for loans are on an IR >7% is not a temporary macroprudential measure. This is a measure to ensure borrowers can pay back mortgages when interest rates return to more historically normal levels.
https://t.co/z98Zop5QEy