Banks' home loan practices warrant 'particular attention': RBA

by AB31 Mar 2014
The Reserve Bank of Australia has indicated it is keeping a close eye on banks’ lending practices.

“Given that low interest rates and rising housing prices have the potential to encourage speculative activity in the housing market, one area that warrants particular attention is banks’ housing loan practices,” RBA said in its March financial stability review.

While there are signs of an increase in high-LVR lending among some institutions, the aggregate share of banks’ housing loan approvals with high LVRs is around 13% and has remained fairly steady for the past two years, RBA said.

Low-doc lending still accounts for less than 1% of loan approvals in the December quarter 2013. In aggregate, the interest-only share of new lending has been slightly below 40% in recent quarters, following its gradual rise since 2009, RBA data shows.

While interest-only loans tend to pay back more slowly than standard loans which require the repayment of principal and interest, banks have observed some borrowers with interest-only loans pay back principal during the interest-only period and therefore build up mortgage buffers, RBA said.

“It is also common practice for banks to require borrowers to demonstrate the ability to service the higher principal and interest payments that follow expiry of the interest-only period, potentially reducing the number of borrowers that may fall into difficulty when required repayments increase.”

RBA said this practice is consistent with NCCP Act requirements.

Changes to Australia’s comprehensive credit reporting – which came into play this month – may let lenders to be more risk sensitive in their lending decisions (for example, through more risk-based loan pricing) especially for new customers, RBA said.

The reserve bank also hinted that APRA would soon release updated guidelines to banks on lending practices.

“It is important for banks’ risk management that they are vigilant in maintaining prudent lending standards, given that a combination of historically low interest rates and rising housing prices could encourage speculative activity in the housing market and encourage marginal borrowers to increase debt. APRA’s forthcoming Prudential Practice Guide, which will outline its expectations for prudent housing lending practices, should assist banks in this regard.”