While many brokers have questioned APRA’s proposal to crack down on the “systemic concentration” of loan portfolios in residential mortgages, some see the move as necessary.
In its proposal to change authorised deposit-taking institutions’ capital framework APRA said this systemic concentration poses prudential and financial stability risks.
The prudential regulator noted in a discussion paper released on 14 February that residential mortgages as a share of ADIs’ total loans have increased significantly, from just under half to more than 60%.
“While losses incurred on residential mortgage portfolios in this period have been limited, this level of structural concentration poses prudential and financial stability risks, particularly in an environment of high household debt, high property prices, weak income growth and strong competitive pressures among lenders,” it said.
Lighthouse Financial Services director Paul Lewis said he does not think the degree of concentration poses stability risks, finding it surprising that APRA would consider having more than 60% of ADI portfolios in residential mortgage loans a problem.
He said Australians are highly tenacious when it comes to keeping their homes, and will make necessary sacrifices to hold onto their houses.
“If there was ever a time where evidence backs up this statement, you only need to look at the period through the 1980s, when interest rates were at record highs, peaking at around 18% p.a.”
He said that period saw no bloodbath of mortgage collapse despite the crippling repayment levels.
“Why? Because Australians will fight to the death to keep their family homes.”
However, Confidence Finance director Curtis Stewart believes the level of concentration does pose market-wide risks. The high proportion of mortgage debt as a percentage of ADI balance sheets makes it fair to generalise that the stability of ADIs – and the broader financial system – is underpinned by borrowers being able to repay their loans, he said.
He stressed the importance of bank serviceability calculators in ensuring mortgage holders have buffers to meet their repayments, even in changing economic conditions.
“In the way loans are originated in Australia, a customer’s servicing position is tested once at the beginning to determine if they can service a 30-year loan. This means that this serviceability test is the only real place where buffers can be applied to ensure mortgage holders can meet their repayments.”
He said this explains why much of APRA’s activity revolves around the way lenders calculate serviceability.
Stewart also believes APRA’s focus on IO lending is warranted, saying that Australia’s higher percentage of debt on IO terms compared to other countries makes it a cause for concern.
IO borrowers pose risks to the financial system through the potential for payment shock when their IO terms expire and they have to start paying back the principal of their loans.
“This increase in repayments could lead to an increased risk of default if the customer doesn’t have lending options available,” said Stewart.
Lewis said the statistics around the high percentage of loans on IO terms are skewed.
“The reason for the misleading data is simple: many property investors will or have used equity in their homes to purchase their investments. The equity leveraged would typically be IO and secured against their O/Occ homes,” he said.
He added that the raw data does not address the purpose of loans, so this type of lending simply looks like “owner-occupied IO” lending.
“The truth of the matter is that the vast majority of people with only a single home loan will be paying P&I repayments. There would be very few true owner occupiers with IO home loans being their only borrowing,” he said.
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