The recent rise of investor loans and interest-only loans could leave Australian banks exposed in the event of adverse market movements.
According to global credit ratings and research group, Fitch, there has been strong growth in investor and interest only loans, as well as indications that owner-occupiers are also increasingly opting for interest-only terms.
The ratings agency says this may increase the risk profile of banks' mortgage assets in the event of adverse market movements, such as higher interest rates and a general macroeconomic slowdown.
Fitch’s analysis indicates that the risk for investment mortgages is higher than in the case of owner-occupied mortgages, which suggests a speculative element to recent rises in house prices and a riskier credit profile for the banks.
Meanwhile, the rise in interest-only loans – for both investors and owner-occupiers – also raises the susceptibility of borrowers in the event of an economic downturn, due to the slower accumulation of borrowers' equity relative to more traditional principal-and-interest loans.
However, the ratings agency maintains that the risks of unmanageable losses in the mortgage portfolios of major banks are low. Since the introduction of the NCCP, low-documentation and other non-standard loans have decreased significantly, and high loan-to-value lending has remained stable as a proportion of the total, despite the rise in prices.
The ratings agency also says the high prevalence of lenders' mortgage insurance in Australia adds a buffer in the event of losses, covering about 20%-25% of the major banks' mortgage portfolio.
But not everyone in convinced. Leith van Onselen, economist and writer for Macro Business
says, “Cutting through the guff, interest only and investment loans are Australia’s subprime accident in the making.”