Bendigo Bank Hikes Some Mortgage Rates By 0.8%

From Australian Broker.

Bendigo Bank will adjust its mortgage pricing to address competitor movements and respond to regulatory caps on growth, after a decision made at its regular pricing committee meeting. Once again the move highlights that owner occupied principal and interest loans is the new battleground.

Managing director Mike Hirst said the changes reflect the requirement to meet the regulator’s expectations while responding to the ultra-competitive owner occupied mortgage pricing market for new lending.

“When setting interest rates our bank needs to consider many factors and carefully take into account the needs of our stakeholders including customers, shareholders, staff, partners and the broader community,” Hirst said.

“We’ve tried to carefully balance the interests of our mortgage customers, those who earn money through deposits and those who invest in our Bank, all while ensuring our pricing remains market competitive and provides the strategic springboard for accelerated growth.

“There is an intrinsic link between the profits our bank generates and the economic and social sustainability of the hundreds of communities in which we operate.  We value the continued commitment of our customers as we strive to grow our business in an extremely competitive market.

“We believe the changes announced today puts the bank in the best position to achieve this and ensuring we remain well below the 30 percent interest only settlements cap and 10 per cent growth limit for investor loans,” he said.

The following pricing changes will occur, effective Friday 14 July;

  • Variable interest rates will increase by 0.30% for existing owner occupied interest only customers and 0.40% for existing investment interest only customers
  • New business interest only variable rates will increase by 0.40% to 0.80% with fixed interest only rates increasing by 0.10% to 0.40%
  • New Business investment P&I variable rates will decrease by 0.15% with fixed P&I interest rates decreasing by up to 0.30 %

“We will also continue to waive the $625 application fee for all owner occupied purchases and external refinances that take out a Bendigo Connect P&I product,” Hirst said.

“Customers currently paying interest only repayments are encouraged to convert to principal and interest repayments. Where the customer meets the lending criteria, the application and settlement fees will be waived.

“We will continue to assess the market conditions and make any subsequent changes as required to maintain our competitiveness, balance our regulatory restrictions while supporting our customers and their communities,” he said.

CBA Ups Interest Only Mortgage Rates

CBA changed their mortgage rates for owner occupied and investor mortgage holders from 7th July. This includes a significant hike for interest only.  They already tightened serviceability requirements a couple of weeks ago.  Principal and Interest Ower Occupied holders get a 3 basis point reduction! All this has, they say, nothing to do with the bank tax.

Commonwealth Bank recognises the importance of ensuring borrowers can sustain a strong path to property ownership and will be reducing our owner-occupier standard variable rate for those repaying principal and interest. From 7 July, customers paying off the home they live in will benefit from a lower standard variable rate of 5.22 per cent per annum, a reduction of three basis points.

Around 80 per cent of owner-occupier customers are repaying principal and interest, and these changes can help these borrowers own their home sooner. A customer with an average mortgage of $350,000 will save $78 a year.

We are supportive of the banking regulator’s moves to manage the level of growth and resiliency in the housing market. To meet our regulatory requirements, variable interest only home loan rates for owner-occupiers and investors will increase by 30 basis points.

Matt Comyn, Group Executive of Retail Banking Services, said: “Paying off your home is important for Australians. For owner occupier customers repaying principal and interest, they can take advantage of the interest rate reduction to pay off their home loan faster. These changes also help us keep the right balance in our home loan portfolio, in line with what our regulators require.”

Customers who currently make interest only payments are encouraged, where they are able, to switch to principal and interest repayments. Switching is easy and attracts no fees. Customers can make the change at no cost online, over the phone, or by speaking with a home lending specialist in branch.

These interest only changes are not in response to the bank levy that was announced as part of the Federal Budget in May.

The new rates will be effective from 7 July 2017.

Variable rates Current New from 7 July 2017  
Standard Owner-Occupied Principal and Interest 5.25% pa 5.22% pa -3bps
Standard Owner-Occupied Interest Only 5.47% pa 5.77% pa +30bps
Standard Investor Principal and Interest 5.80% pa 5.80% pa
Standard Investor Interest Only 5.94% pa 6.24% pa +30bps

Not in their interest: The home loan borrowers that have been left out to dry

From The SMH.

There is a hidden and worrying risk lurking for a particular set of mortgage borrowers, whose level of financial stress is about to get a whole lot worse.

It’s those home owners with interest-only loans that are now increasingly under the pump – with National Australia Bank the latest of the big four to announce big hikes in rates on these types of loans.

While banks, the media and the government regularly characterise those that have interest-only loans as wealthy property investors, the fact is that there are many owner-occupiers that have used this method to finance the family home.

Ironically, regulators have pushed the banks to reduce interest-only lending to improve the overall risk of consumers’ debt to the financial system. But for those investors with interest-only loans, the chances of being unable to service them creates a new and unintended risk.

These hikes have not attracted the ire of the government, which has put the banks on notice that any move to increase mortgage rates will be intensely scrutinised. Again, because it is not seen as hitting the political heartland of the average voter with a mortgage to finance their own home.

But these borrowers are particularly vulnerable because many of them took out their interest-only loans because they didn’t have enough cash flow to repay interest and principal.

The banks have been under regulatory pressure to herd these interest-only borrowers into interest and principal loans – offering little or no fees to change over to principals, and interest rates that are now around 0.6 per cent lower.

The catch though is that monthly repayments will be higher in most cases because the borrower also needs to repay principal.

Those that can afford to switch will do so, but there will be many that will need to remain on interest-only and have to wear the rate increase.

For owner-occupiers who have an interest and principal loan, interest rates have not fallen by much in this latest round of adjustments.

National Australia Bank and Westpac customers will see their rate fall by 0.08 per cent while ANZ customers will benefit to the tune of 0.05 per cent.

It is better than nothing, but won’t have a really meaningful impact to the weekly household budget.

For banks, the positive effect of the far bigger increases on interest-only loans will significantly outweigh the negative impact of the small fall in rates on interest and principal loans.

Indeed Westpac – which has a higher proportion of interest-only loans than the others – could boost its earnings by 3.5 per cent, according to research from Macquarie. This is calculated on the basis of all other things being equal.

But Macquarie takes the view that this earnings benefit will be eroded to some degree by some customers switching to interest and principal loans – the caveat being if they can afford it.

Martin North from industry consultant Digital Finance Analytics believes that some investor/borrowers that have interest-only loans would have less incentive to switch because the tax effectiveness of this type of borrowing could be negatively affected.

Young families, investors most at risk

The bottom line is that regardless of the kind of borrower, the overall effect of this latest round of interest rate resets will be to improve bank earnings, because in aggregate borrowers will pay more.

North said the two segments most at risk for mortgage stress are younger families that are more typically first home owners that pushed their finances to get into the property market over the past couple of years and at the other end of the spectrum a more affluent group that took advantage of the rising property market and low interest rates to buy one or more investment properties.

Both North and analysts at Macquarie warn that the flow-on effects from increased rate rises even on just interest -only loans, and the potential for some to switch to interest and principal, could be damaging for the wider economy.

“The increase to IO (interest-only) loans combined with the increased likelihood of customers switching to P&I (principal and interest), in our view, will ultimately lead to further reductions in disposable incomes and put even greater pressure on highly indebted households. We estimate that a 50 basis point increase in interest rates has a 4 to 10 per cent impact on disposable income of highly indebted households.

“While it would rationally make sense for many households (particularly for owner-occupiers) to switch to P&I, …. many of these households would not have capacity to do this,’ Macquarie said in a note to clients this week.

‘Deadly combination’

In analysing the reasons for an increased level of stressed households, North noted that “the main drivers are rising mortgage rates and living costs whilst real incomes continue to fall and underemployment is on the rise. This is a deadly combination and is touching households across the country, not just in the mortgage belts.’

Against this, the incentive for banks to massage rates higher is greater than ever, given they have been hit by the Federal Government’s bank levy and this week by an additional tax from the South Australian government that many fear could be adopted by other states down the track.

On the other side of the household ledger, the lack of any real growth in wages is only exacerbating the squeeze.

A report from Cit this week that analyses the industry segments in which jobs are growing provides insight into the problem.

“Not only does Australia have an underemployment problem that has been highlighted by the monthly labour force series, but the quarterly data shows that the economy is creating mostly jobs that are below average in terms of earnings,” it said.

Brokers slam APRA’s ‘sledgehammer’ approach to IO loans

From The Adviser.

The Australian Prudential Regulation Authority has been castigated by brokers for its nationwide “sledgehammer” crackdown on interest-only loans, which have been labelled as “myopic” and “devastating” for regional Australia.

Damian Collins, managing director of Momentum Wealth in Perth, told The Adviser that APRA’s moves to limit the flow of new interest-only loans were based on a “sledgehammer” approach that neglected to consider the impact on areas outside of Sydney and Melbourne.

He added that “everyone outside of Sydney and Melbourne should be feeling fairly aggrieved” by the measures.

Mr Collins said: “We got told in WA [in April], that for investor refinances, [lenders] are not doing them… so, you can tell APRA is definitely putting the pressure on the banks to manage their loan book growth, which is strange because in WA there aren’t a lot of investors doing anything at the moment.

“So, I guess [APRA] aren’t really looking at it state by state, they’re just looking at it as a global pull and finding any way they can to make changes.”

The Momentum Wealth MD went on to say that some of his clients in WA had previously been able to borrow around $2 million and, within a couple of months of the macroprudential measures being announced, that figure dropped down to $700,000.

“We used to have some lenders that, for our clients that had three or four properties already, would have assessed existing debt at actual rate, so they might be paying 4.5 per cent. But, pretty much all the lenders now have switched to servicing everything at 7.5 or 7.25 per cent, so for existing investors with a decent portfolio, it’s certainly made it a lot tougher.”

Mr Collins lamented that the regulator had not taken a state-by-state approach.

He said: “It is quite staggering… Maybe they should say: ‘Right, for investor growth in [postcodes] 3,000-3,200 or 2,000-2,200 (or whatever those postcodes are [in Melbourne and Sydney]) any properties secured by IO loans in those postcodes we’re restricting’. But, there is just a blanket ban nationally, it’s crazy. And it has certainly affected not just Perth but pretty much everything outside of Sydney and Melbourne.

“It’s like taking a sledgehammer to the problem and certainly has affected investors across the country… You’d think [APRA] would be able to do it better, but they haven’t,” he added.

Touching on the crackdown on interest-only loans in particular, Mr Collins said that the penalties now made this type of loan practically redundant for investors. According to the Momentum Wealth managing director, the repayments on some interest-only loans are the same now as P&I.

He said: “It’s at the stage now where, for a lot of our investor clients, we’re saying: ‘Get a P&I loan, it’s just not worth paying that premium for paying interest-only.’”

However, while Mr Collins said he expects interest-only loans to go “back to normal” in the future, he was “struggling to see how it’s worthwhile to pay that higher rate for interest-only at the moment”.

‘The most devastating manifestation in the financial sector since the GFC’

Roger Ward, director at Cairns Mortgage Brokers, agreed, labelling lenders’ response to APRA mandates as “city-centric” and “damaging” to investment in regional Australia.

He said: “It should be stated that there is no housing bubble in almost all of the rest of Australia. These lending restrictions are being applied nationally and already are driving down investment in regional Australia, an area which needs additional investment, not less.

“Most places in regional Australia have not experienced the growth in real estate asset values like Sydney and Melbourne and look to be casualties to this developing panic in the financial sector over the Sydney and Melbourne ‘housing bubble’.”

Condemning the “myopic” APRA policies, he said the recent changes to interest-only lending policies look to be “the most devastating manifestation in the financial sector since the GFC and is already costing investment dollars in regional Australia”.

He continued: “It’s my professional opinion that APRA and the banks are going to crush investment in regional Australia, all for fear of a housing bubble in our capital cities.”

Echoing Mr Collins, Mr Ward argued that APRA should have called on lenders to address the “hyper-investment issue” in Sydney and Melbourne on a postcode basis.

For example, he suggested that that investors buying in Melbourne and Sydney should have to provide at least a 20 per cent deposit, and that there should be foreign investment restrictions on certain postcodes in Sydney and Melbourne.

He suggested that these measures “would have dealt with the core issue” without affecting the regions, and could even potentially benefit regional Australia as the “frustrated appetite of investors” would lead them to invest elsewhere.

Westpac Tightens Mortgage Lending Policy

Westpac has joined the bandwagon as from 5 June, the bank will reduce the maximum LVR on new and existing interest only lending to 80%. This change will apply across the board to owner occupier and residential investment loans, equity access loans and special borrower packages such as Medico, Industry Specialisation Policy, Sports and Entertainment, and Accounting, Law and Executive Sector loans.

Westpac will also no longer accept new standalone refinance applications for owner occupier interest only home loans from an external provider, effective from 5 June. Internal refinancing for owner occupiers will still be permitted for interest only loans, subject to maximum LVR requirements and customer suitability.

Principal and interest as well as residential investment interest only refinancing will not be affected.

Westpac will continue to waive the repayment switch fee for those wishing to move from interest only to principal and interest repayments. Premier Advantage Package customers can switch at any time with no additional costs. For fixed loans however, certain break costs may apply.

Westpac said in a note to brokers:

“We are committed to meeting our regulatory requirements, and ensuring we are lending responsibly and in the best interests of our customers. We regularly review our polices and processes based on a number of factors such as the impact of regulatory requirements and the economic environment,”

“These changes will help us continue to meet our regulatory requirements and apply responsible lending practices in assessing a customer’s ability to service existing and proposed debts.”

NAB Cuts LVR on Interest Only loans

From Australian  Broker.

National Australia Bank (NAB) has slashed the loan to valuation ratio (LVR) on its interest only loans as it works to fulfil new regulatory requirements.

The changes, effective from 10 June, will set the new maximum LVR for interest only loans at 80%. Previously, this sat at 95% for owner occupiers and 90% for investors.

“NAB is making changes to some of its policies regarding interest only home loans to ensure we continue to meet our regulatory requirements and responsible lending obligations,” the bank said in a broker note

These changes come into play as a result of the 30% cap on interest only lending set out by the Australian Prudential Regulation Authority (APRA) on 31 March. The regulator has requested that this speed limit be met by 1 July.

“As always, NAB wants to continue to ensure we provide customers with product solutions that are in line with their needs, and it is often the case that a principal and interest loan may be the most suitable arrangement.”

The new maximum LVR for construction loans has also been changed to 90%.

CBA Dials Back Interest Only Loans

The Commonwealth Bank of Australia (CBA) announced changes to interest only transactions for both new owner occupied and investment home loans. It will honour existing applications submitted for assessment by COB Friday 9 June, but the new rules start on Monday 22nd May.

This reflects a response to the recent regulatory tightening. This is in addition to the interest rates rises already imposed in February, March and April.

Effective from Monday 22 May, the bank will offer the following reduced discounts for new owner occupied and investor home loans with interest only payments:

  • A reduced discount offered through the Home Loan Pricing Tool (HLPT) for new home loan and investment home loans with IO payments
  • The elimination of any discount for those who submit a pricing request for new home loan and investment home loans with P&I repayments who later switch to an IO repayment type

CBA’s $1,250 Refinance Rebate for select interest only owner occupier home loans will also end. This rebate will only be available for owner occupier principal and interest home loans via the HLPT.

The bank has also made further LVR changes which will be effective from Saturday 10 July:

  • Reducing the maximum LVR from 95% to 80% for new owner occupier interest only home loans
  • Reducing the maximum LVR from 90% to 80% for new investment interest only home loans

Changes have also been made to repayment types for building and construction loans. These will be effective from 10 July.

  • CBA will no longer accept IO payments for home loan and investment home loans which are construction or building loans. Instead, the loans must have P&I repayments after construction is complete and the loan has been fully funded
  • CBA will permit construction loan applications submitted for full assessment by COB 9 June with IO payments to proceed to funding

They also remind brokers that repayments on P&I construction loans are interest only until building is completed and the loan is fully funded. At this point, payments switch to P&I. This means the bank will apply the lower P&I reference rate to the interest charged during the construction period.

“In March, the Australian Prudential Regulation Authority (APRA) announced the introduction of a new measure to limit the flow of new Interest Only (IO) residential mortgage lending to 30%. Commonwealth Bank is committed to ensuring we meet our customer’s needs while maintaining our prudent lending standards and meeting our regulatory requirements,” the bank wrote in a statement to brokers.

“To help meet these commitments, we are introducing changes that encourage customers to choose principal and interest repayments, where this meets their needs. We are also increasing our already robust monitoring and reporting activities to ensure that where Interest Only payments are selected, they are suitable for customers’ needs.”

ANZ tightens interest only lending portfolio

From Australian Broker.

ANZ has announced changes to its interest only loans in compliance with government efforts to reduce banks’ exposure to this type of asset.

The bank announced that effective May 29, the maximum interest only period will be reduced from 10 years to five years to allow “investment lending to align to the maximum for owner occupier lending.”

According to an announcement on the company website, this new provision will apply to all ANZ home loan and residential investment loan products.

It will also waive the renegotiation fee for customers who want to shift their interest only to principal and interest repayments, applicable to the same above mentioned products.

Meanwhile, the bank will apply a minimum rental or board expense of $375 per month to residential investment loans to borrowers who are not currently occupying their own homes. The fee will be charged to residential investment loan products and equity manager accounts, the bank said in its announcement.

Changes to ANZ’s loan provisions is in keeping with the regulatory initiatives geared towards bringing down banks’ exposure to interest only loans to 30%, according to a report on news.com.au.

The report also said that the bank will “crack down on customers failing to chip into their principal and also hit those with loan to value ratios higher than 80%”

Brokers have their say on IO crackdown

From The Adviser.

APRA’s latest curb on interest-only loans aims to reduce risk in the mortgage market, but several leading brokers have told The Adviser that all is not what it seems.

When the Australian Prudential Regulation Authority (APRA) announced in March that it expected banks to limit the flow of new interest-only loans to 30 per cent of total new mortgage lending and place limits on LVRs above 80 per cent, several brokers wrote to The Adviser about their thoughts on the new supervisory measures.

Some brokers opined that there is still a place for interest-only (IO) loans, as long as the reasons behind putting a customer in such a loan are sound.

There is place for IO loans

Chris Foster-Ramsay of Foster Ramsay Finance, said: “I think there is a place for IO loans for true IO purposes, but for cash flow purposes, which it has become, no, there’s not.”

His thoughts echo those of Brett Halliwell, general manager of Advantedge Financial Services, who said: “There is absolutely a part for [IO loans] in the market already and all sorts of brokers recommend it for different circumstances.

“[But], if I look at the regulators’ role (i.e. APRA and ASIC both together), it’s their role to be really ‘glass half empty’ a lot of the time, and while we are looking at the positives to the customer and why IO might make sense, there are negatives. And, when you look at the fact that we’ve had a really good run in Australia in economic conditions, that, at some stage, will turn.

“So, I don’t think that the regulator is saying that [IO loans] are necessarily bad, they’re saying there is a place for it, there needs to be different standards for it.”

Mr Foster-Ramsay added that he thought the changes had already “created a different direction in the market”, and predicted that “it won’t be too long before there is up to a 120-basis-point difference between an owner-occupier P&I loan and an IO investment loan”.

He continued: “I think the ability to get an IO facility will also become increasingly difficult… I’d go as far as to say that the IO facilities for 10 to 15 years are gone but we may see an IO facility for five years with a loading for the P&I for 25 years.”

Notably, some brokers have taken to The Adviser website to highlight several scenarios where they thought IO loans would be suitable (such as for customers buying a home to live in that could transfer into an investment property or for self-employed customers with lumpy income flow), but said that the crackdown has made them reluctant to advise clients to take out IO loans, even when they are suitable.

‘Precautionary not reactionary’

Other brokers said that they were not surprised by the new measures, with Aaron Christie-David, director at Atelier Wealth, stating that he had been recommending principal and interest (P&I) loans to his clients for the past year, in anticipation of the changes coming in.

He told The Adviser: “We were telling our clients last year that we would put them on P&I investment loans, because we could anticipate these changes were coming. Some brokers have been up in arms about it but they should not have been surprised that IO loans came under the microscope, it was a matter of time.

“If you have the cash you should be paying off debt as quickly as possible. That’s what the banks are telling people and that has been backed up by APRA and ASIC,” he said.

“If rates go up and you roll off an IO period in five years’ time, when rates probably would have risen, and you maybe have a child or have lost a job, that’s a recipe for disaster. Especially if no one will refinance them — your repayments could go up 30-40 per cent. That’s where I get concerned.”

He added: “People think these are reactionary measures in the market, but they’re almost precautionary measures for the future.”

Specialist lending broker Peter Ellis from Lending Mate said he thought the changes should have actually come in sooner, stating: “With property prices rising, and the speed at which they have been selling, something was bound to occur. More concerning, though, is how debt as a percentage of household disposable income is at 187 per cent (according to Reserve Bank figures)… if this was left unchecked we may have well seen a wider raft of changes instigated.

“The regulators have a hard job to do and no matter what move they make someone will always be unhappy. But, in the interests of the nation, some controls had to be put in place to stop property becoming a commodity. Personally, I think change was needed sooner, but better late than never.”

Others, such as Daiman McIntyre of Ruahine Finance voiced the opinion that different levers, other than speed limits, should have been put in place to reduce risk.

The Victoria-based broker said: “APRA (and ASIC) clearly have concerns in regards to residential investments, and are using the tools they have, which are industry wide and sledgehammer like, to implement a task that really needs much finer and delicate management that government tax policy might better address.

“Ideally government should be targeting negative gearing, and creating limitations on properties to produce a better, long-term result without restricting some segments of lending. Industry doesn’t buy equipment to lose money, so why is it almost encouraged in residential property?”

Citi Australia halts new foreign interest only lending

From Australian Broker.

Citi Australia has updated its new home loan policies including a freeze on new interest only lending to foreign buyers.

Effective from 13 April for all new Citibank applications, the interest-only repayment option on both standard variable loans and the Mortgage Power line of credit is now not available for:

  • Loans solely with owner occupied security
  • All non-resident loans
  • Loans reliant on foreign income
  • Loans which require FIRB approval

“This means, interest only repayments will only be allowed for resident loans secured by investment property, unexpired pipeline deals remain unaffected,” the bank said in a note released to brokers.

For loans with mixed securities (cross-collaterised owner occupier and investment properties), interest only repayments and Mortgage Power are only available on the portion of the loan that exceeds the value of the owner occupied security.

Citibank has also announced that interest only repayments will not be available for mortgages with an LVR of greater than 80%.

Finally, the bank’s offset mortgage product will no longer be offered to all new Citigold non-resident and foreign income applications.