Tag: Investment Lending

Non Bank Lending Up, Overall Growth Lower, But Another Record Hit

The RBA has released their credit aggregates to April 2018. Total mortgage lending rose $7.2 billion to $1.76 trillion, another record. Within that, owner occupied loans rose $6.4 billion up 0.55%, and investment loans rose 0.14% up $800 million.  Personal credit fell 0.3%, down $500 million and business lending rose $6.3 billion, up 0.69%.

Business lending was 32.5% of all lending, the same as last month, and investment mortgage lending was 33.7%, slightly down on last month, as lending restrictions tighten.

The monthly trends are noisy as normal, although the fall in investor property loans is visible and owner occupied lending is easing.

But the annualised stats show owner occupied lending still running at 8%, while business lending is around 4% annualised, investment lending down to 2.3% and personal credit down 0.3%.  On this basis, household debt is still rising.

One interesting piece of analysis we completed  is the comparison between the RBA data which is of the whole of the market and the  APRA data which is bank lending only.

Now this is tricky, as the non-bank data is up to three months behind, and only covers about 70% of the market, but we can get an indication of the relative momentum between the banks and non banks.

We see that non-bank lending has indeed been growing, since late 2016. The proportion of loans for property investors is around 28%, lower than from the banks.  Back in 2015, the non-bank investor split was around 34%.

The percentage growth from the non-bank sector appears stronger than the banks. Across all portfolios, loan reclassification is still running at a little over $1 billion each month.

Finally if we look at the relative growth of owner occupied and investment loans in the non-bank sector we see stronger investment lending in the past couple of months.  Bank investment property lending actually fell on April according to APRA stats.

As expected, as banks throttle back their lending, the non-banks are filling some of the void – but of course the supervision of the non-banks is a work in progress, with APRA superficially responsible but perhaps not actively so.

We would expect better and more current non-bank reporting at the very least APRA, take note!

 

APRA to remove investor lending benchmark

The Australian Prudential Regulation Authority (APRA) today announced plans to remove the investor loan growth benchmark and replace it with more permanent measures to strengthen lending standards.

The 10 per cent benchmark on investor loan growth was a temporary measure, introduced in 2014 as part of a range of actions to reduce higher risk lending and improve practices. In recent years, authorised deposit-taking institutions (ADIs) have taken steps to improve the quality of lending, raise standards and increase capital resilience. APRA has written to ADIs today to advise that it is now prepared to remove the investor growth benchmark, where the board of an ADI is able to provide assurance on the strength of their lending standards.

In summary, for the 10 per cent benchmark to no longer apply, Boards will be expected to confirm that:

  • lending has been below the investor loan growth benchmark for at least the past 6 months;
  • lending policies meet APRA’s guidance on serviceability; and
  • lending practices will be strengthened where necessary.

As with previous housing-related measures, this approach has been taken in close consultation with the other members of the Council of Financial Regulators. With risks in the environment remaining heightened, it will be important for ADIs to maintain prudent standards and close any remaining gaps in lending practices.

APRA Chairman Wayne Byres said that while the announcement today reflects improvements that ADIs have made to lending standards, there is more to do to strengthen the assessment of borrower expenses and existing debt commitments, and the oversight of lending outside of policy.

Mr Byres said: “The temporary benchmark on investor loan growth has served its purpose. Lending growth has moderated, standards have been lifted and oversight has improved. However, the environment remains one of heightened risk and there are still some practices that need to be further strengthened. APRA is therefore seeking assurances from ADI Boards that they will maintain a firm grip on the prudence of both policies and practices.”

For ADIs that do not provide the required commitments to APRA, the investor loan growth benchmark will continue to apply.

As part of these measures, APRA also expects ADIs to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers. This provides a simple backstop to complement the more complex and detailed serviceability calculation for individual borrowers, and takes into account the total borrowings of an applicant, rather than just the specific loan being applied for.

“In the current environment, APRA supervisors will continue to closely monitor any changes in lending standards. The benchmark on interest-only lending will also continue to apply. APRA will consider the need for further changes to its approach as conditions evolve, in consultation with the other members of the Council of Financial Regulators,” Mr Byres said.

A copy of the letter is available on APRA’s website at: http://www.apra.gov.au/adi/Publications/Documents/Letter-Embedding-Sound-Residential-Mortgage-Lending-Practices-26042018.pdf.

More On The RBA Tweaks – Messy Or What!

I did a mapping between the old and new basis for investor and interest only loans in the RBA credit aggregates. I posted the data earlier.

Since mid-2015 the bank has been writing back perceived loan reclassifications which pushed the investor loans higher and the owner occupied loans lower.

They have now reversed this policy, so the flow of investment loans is lower (and more in line with the data from APRA on bank portfolios). Investor loans are suddenly 2% lower. Magically!

This is the monthly switching:

But two points.

First I am amazed the  banks feels its OK to suddenly change the basis of their calculations, when its such a critical issue. The provided reasoning is perverse – loan switching is “normal”. Suddenly back tracking over the past two years is plain weird.  The section in the Stability Report said it was going to happen. That is all.

Second, it once again highlights the rubbery nature of the data on lending in Australia. What with data problems in the banks, and at the RBA, we really do not have a good chart and compass.  It just happens to be the biggest threat to financial stability but never mind.

Standing back though, despite the static growth in investment lending, do not forget that overall debt is still rising faster than incomes, by a factor of two to three times.

Owner occupied lending must be tamed too if we are to ever get back to a more even keel – the case for more macro-prudential intervention just got stronger!

Business Finance Still Skewed Towards Property

The final piece of the October 2017 lending finance data came from the ABS today. It is not pretty.  As usual we will focus on the trend series which irons out some of the statistical bumps.

Owner occupied housing lending excluding alterations and additions fell 0.1% in trend terms. Personal finance commitments rose 1.3%. Fixed lending commitments rose 2.2%, while revolving credit commitments fell 0.1%.

Total commercial finance commitments fell 1.1%. Fixed lending commitments fell 2.5% (which includes mortgage lending for investment purposes), while revolving credit commitments rose 3.7%.

The trend series for the value of total lease finance commitments fell 0.7%.

Here is the summary with the relative percentage for owner occupied housing and personal finance rising (so putting more pressure on household debt ratios in a flat income, rising cost market). Overall lending to business, relative to all lending fell again.

Personal credit is rising, now, as households find their cash flow is under pressure, many are now seeking fixed loans to help bridge the gap left by falling savings.  In prior years there was a fall at this time of year, before the Christmas binge, but that is different this year. This does not bode well for Christmas spending, and we see signs of the New Year sales already underway!

Then finally, if we look at the fixed business lending, and split it into lending for property investment and other business lending, the horrible truth is that even with all the investment lending tightening, relatively the proportion for this purpose grew, while fixed business lending as a proportion of all lending fell.

These a clear signs of a sick economy (in the sense of unwell!), with business investment still sluggish, still too much lending on property investment, and as we showed above, too much additional debt pressure on households.

I will repeat. Lending growth for housing which is running at three times income and cpi is simply not sustainable. Households will continue to drift deeper into debt, at these ultra low interest rates. This makes the RBA’s job of normalising rates even harder.

The mid-year economic forecast, later in the week will likely simply underscore the fact the economic settings are not appropriate. And, by the way, tax cuts, even if they could be paid for, will not help.

Mortgage Reclassification Still An Issue

The RBA said recently, when they released their credit aggregates to end March, that $51 billion of loans have been switched from investor to owner-occupier, with $1.2bn in March.

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $51 billion over the period of July 2015 to March 2017, of which $1.2 billion occurred in March 2017. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

With the current balance of investor loans sitting at a record $577 billion, nearly 10% of the book has been switched to lower owner occupied rates. We of course cannot tell if this switching is legitimate, or opportunistic to get a lower interest rate and helpfully reduce the bank exposure to investor loans. The RBA data shows strong “corrected” investor growth of 7.1%, higher than owner occupied loans.

According to a report in the Australian today:

Responding to questions on notice from a Senate economic committee hearing, APRA said the switching “highlighted that some (lenders) have not had ­sufficiently robust practices” for monitoring the status of their borrowers and the data previously submitted to the regulator was “incorrect”.

APRA forced several banks to upgrade their reporting capabilities and, as a result, “some have strengthened their procedures”.

Tasmanian senator Peter Whish-Wilson, who asked APRA if its data was accurate, said the ­reclassification of loans was “concerning, whether it’s deliberate or not”.

He said: “I’d be loathe to see if any sort of systemic changes by the banks to loan classification were made to continue to grow loans to investors when it’s clear APRA is trying to crack down on what is potentially a very serious issue.”

ANZ Hikes Investor Loans (Again)

From news.com.au.

ONE of the nation’s largest banks ANZ has lifted interest rates on home loan deals.

The bank has followed in the footsteps of rivals the Commonwealth Bank and Westpac, moving interest rates on both owner occupier and investor loans.

Some of the moves also include decreases and are effective immediately.

The moves come ahead of the Reserve Bank of Australia board meeting on Tuesday where it’s expected they will keep the cash rate on hold at 1.5 per cent.

Owner occupiers and investors signing up to interest-only fixed rate deals will be the worst hit with some hikes as high as 0.4 per cent.

On 2, 4, and 5 year fixed owner occupier interest-only loans the rates will rise by 0.4 per cent on the bank’s Breakfree products (this is one of the bank’s most popular products).

On one of the most popular fixed loans terms, three-year owner occupier interest-only loans will rise by 0.3 per cent to 4.49 per cent increasing repayments on a $300,000 30-year loan by $75 per month to $1123.

For investors on a three-year fixed-rate interest-only Breakfree deal the rate will rise 0.3 per cent 4.69 per cent, pushing up repayments by $75 per month to $1173.

For both owner occupiers and investors on principal and interest fixed rate deals rates on nearly all these products will fall.
Borrowers have been hit by fixed rates increases in recent weeks.

Borrowers have been hit by fixed rates increases in recent weeks.Source:Supplied

The three-year fixed rate owner occupier principal and interest deal will fall by 0.2 per cent to 3.99 per cent saving customers $34 per month and making repayments $1431.

On a three-year fixed rate investor principal and interest deal the rate will fall by 0.1 per cent to 4.44 per cent.

An ANZ spokesman said the “reflect our need to closely manage our regulatory obligations, portfolio risk and the competitive environment.”

Mozo spokeswoman Kirsty Lamont said the increases by ANZ are a result of the financial regulator, the Australian Prudential and Regulation Authority limiting their interest-only lending.

Mozo spokeswoman Kirsty Lamont said there’s increasing pressure on financial institutions to limit interest-only lending.Source:News Corp Australia

“It’s now more important than ever for interest only borrowers to do their homework on where to find the best rates in this current climate of tighter regulation,’’ she said.

“With the Federal Reserve jacking up rates in the US and inflation just scraping within the Reserve Bank target, we expect a cash rate increase in the next 12 months which means these fixed rates are unlikely to be around for a long time.”

CUA will temporarily pause accepting investor lending applications

Credit Union Australia (CUA) has said it will temporarily pause accepting investor lending applications until further notice, including applicants refinancing from other financial institutions.

The changes will temporarily apply to all applications for new investor loans, and will impact applicants who have lodged investor applications that do not yet have pre-approval, conditional approval or full approval.

Chief Operating Officer, Member Services, Andy Rigg said that CUA had seen a sharp increase in investor lending volumes in recent weeks, driven by CUA’s competitive loan offers and market conditions.

“We have been closely monitoring our year-on-year investor lending balance growth to ensure that we continue to lend prudently while remaining within the 10% regulatory growth benchmark,” he said.

“We have observed an increase in new investor applications, particularly in response to some of the actions taken by other lenders to slow their investor growth.

“In response to the continued growth in our investor lending and forward projections of this growth, we’ve taken the decision that we need to temporarily pause new investor lending.”

Those applicants impacted by the change are being contacted directly by CUA.

The decision is part of a coordinated strategy by CUA to manage investor lending growth and follows other recent changes that CUA has made to interest rates and loan-to-valuation ratios. CUA is one of a number of lenders that have recently taken similar steps to restrict new lending to investors.

Risks In The Banks’ Property Investor Portfolio

In the world of microprudential, the status of individual households and their finances becomes ever more important from a risk perspective. We have already shown that some investment property holders are near to the edge, financially speaking, and would be troubled by rising interest rates or a forced conversion from interest only to interest and principle repayments.

The Basel Committee is pushing towards a requirement for banks’ to hold higher capital where the servicing of the loan is “materially dependent” on regular rental streams. Whilst this might seem arcane when the average vacancy rates are quite low, even now there are significant state variations.  Vacancy rates in WA in particular are high.

So using data from our extensive household surveys, we have been looking at the finances of property investors, with the question of servicing the loan in mind should rental streams dry up.

To do this we created a custom data series using the following logic.

We are looking at the available funds, on a cash flow basis after living costs, servicing the OO mortgage (if held) and tax.  Next we compared this to the costs of the investment property, again on a cash flow basis.

Looking across our household segments, the more affluent households are more likely to find their available funds would not cover the costs of the investment property (all done on an annual basis), whilst those with lower incomes, and who are less affluent are actually better positioned.

If we cut the data by our property segments, portfolio property investors have the highest exposure, followed by first time buyers.

Finally, we can look across the regions, and we find that property investors in Hobart are more exposed (though rental vacancies are lower there) but property investors in NSW also more highly exposed (thanks to larger mortgages compared to income).

This alternative way to view the market could become important if differential capital weightings were to be applied.  This could move from a theoretical discussion, to one of relative risk-based pricing down the track. Most lenders would not currently differentiate on this basis.  Granular data is required to look through this lens.

CBA targets third party origination in investment lending crackdown

From Australian Broker.

The recent tightening of investment lending practices by the Commonwealth Bank of Australia only apply to those loans coming through the third party channel, it has been revealed.

Last week, it was reported that the CBA had halted any new refinance applications for standalone mortgages.

A notice sent to the bank’s broker network stated: “To ensure we continue to meet our commitments, from Monday 13th February we will be suspending the acceptance of new refinance applications for Investment Home Loans, until further notice.

“Applications which include both Investor and Owner Occupier loans are not impacted.”

While the notice appeared to apply to all refinance investor loans, the major bank has now told Australian Broker that these changes apply solely to intermediary-sourced loans. Borrowers will still be able to access refinance investor loans via CBA’s retail branches.

“We’re committed to meeting our responsible lending and regulatory obligations and to ensure we continue to meet this commitment, we are unable to accept new refinance applications for Investment Home Loans from our broker partners,” a CBA spokesperson told Australian Broker on Wednesday.

“The vast majority of our single property investment home loan refinances come to us through our broker partners so the decision was made to address this in the first instance to ensure we continue to meet our regulatory requirements.”

“We constantly review our products, policies and processes to ensure we’re meeting our customers’ financial needs,” the spokesperson said.

This decision comes soon after CBA subsidiary Bankwest announced it too would halt all new applications from customers looking to refinance their standalone investment lending.

ANZ, Westpac and NAB have thus far made no changes to their investment lending policies in either the third party or retail channels

Another Nail In The Investment Lending Coffin

AMP has announced it will no longer accept loan applications to refinance stand-alone investment property loans with investment property security as reported by Australian Broker.

Effective tomorrow, 16 February, the bank will also be increasing Investment Interest Only rates by 0.30%, and Owner Occupied Interest Only products by 0.30% per annum.

“We will no longer accept loan applications to refinance stand- alone investment property loans with investment property security. Refinances that include owner- occupied and investment properties remain acceptable, subject to security property values,” the bank said in the announcement.

Investment Principle & Interest products are also increasing by 0.25% pa, effective tomorrow (16 February).

Along with these changes the non-major has also announced notable credit policy changes. The maximum LVR for purchases of investment property loans is reducing to 70% (including LMI), while the credit card servicing rate for calculating loan serviceability will increase from 2.5% to 3% of the credit limit. This change impacts all new loans (owner occupied and investment).

“The changes announced today do not impact pipeline deals or our existing customers and there is no change for new owner-occupied principle and interest loans,” the statement said.

“These changes are being made after recent shifts in consumer behaviour and competitor activity in the property market.”

Sally Bruce, Group Executive AMP Bank commented: “We actively manage our credit policies to ensure we prudently manage risk and align with regulatory requirements.

“With sustained high levels of activity in the property market in 2017, we will continue to closely monitor developments and put measures in place to control and manage the future growth of our investment property portfolio,” she said.

AMP’s changes come following a similar crackdown on investment lending by CBA, last week.