Banks tighten again on interest-only mortgages

From the AFR:

Commonwealth Bank of Australia and other lenders are toughening conditions on popular investment property loans in response to regulatory pressure to clamp down on interest-only products.

Lenders are also repricing many of their other products by offering selective discounts and targeting the most attractive sectors, rather than racing for volume with across-the-board cuts.

St George, Bank of Melbourne and BankSA have announced tougher terms for interest only borrowers in line with their parent Westpac’s recent decision to reduce the maximum allowable interest-only term for investment property loans to 10 years.

CBA, which flagged tougher lending conditions for interest-only borrowers back in July, is offering 10-year interest-only terms for borrowers that live in the dwelling. Those with an investment loan have up to 15 year’s interest only and principal and interest for the remainder of the term.

It’s good timing even if manifestly not enough from APRA. CBA and WBC have been leading a small revival in investors loans:

But as UBS pointed out earlier this week, it’s all far too late:

The most significant findings of the survey were (1) Only 72% of respondents stated their application was “completely factual and accurate”. 21% stated they were “mostly factual and accurate”, 5% stated they were “partially factual and accurate” while 2% “would rather not say”; (2) 32% of respondents who secured a mortgage via a broker stated they misrepresented some element of their application, compared to 22% who secured a mortgage via bank distribution; (3) More concerning, 41% of respondents who used a broker in 2016 and misrepresented elements of their application stated they did so based on their broker’s suggestion (vs 13% for bank channel equivalent)…

Of the 344 respondents who stated they misrepresented parts of their application: 14% over-represented household income (18% of those who used brokers and 5% who used bank networks); 13% overstated other assets; 17% under-represented other financial liabilities; 26% under-represented living costs; 11% “other”; 31% “would rather not say”. 12% stated they misrepresented multiple factors.

Unfortunately survey results suggest misrepresentation is systemic with findings similar across the 2015 and 2016 Vintages, price to income levels, LVR, owner occupiers and investors. However, there was a correlation between borrowers who misrepresented their application and: those whose expenditure was broadly equal to their income; stated they are under financial stress; or have missed a debt payment…

Interestingly customers who come from NSW were more likely to misrepresent their mortgage applications. Notably this continues to be the most buoyant housing market in Australia. Customers from Queensland are more likely to be factually accurate.

Finally, the use of mortgages for investment purposes accelerated in 2016 contrary to the banks’, RBA and APRA’s data…

We believe this ties in with the ‘areas of less factual accuracy’ section above. This may suggest some customers were not factually accurate when stating the purpose of the loan, especially given the higher interest rate which has now been introduced on Investment Property compared to Owner Occupied mortgages.

What does this mean?

We believe these results are disturbing given: the recent housing market reacceleration; elevated household leverage (186% debt to income); and mortgages accounting for 62% of bank loans.

While banks have tightened underwriting following APRA’s ‘sound lending’ guidance, it does not appear to have prevented applicants ‘stretching the truth’. While low unemployment and rising house prices may help prevent losses near term, more rigorous auditing of applications appears essential, especially via brokers…

We believe it is more important than ever that the banks tighten their mortgage underwriting standards and ensure applications are factually accurate. We continue to see the mortgage broker network as a potential area of weakness in this process.

After what they did to the US housing market, these loans should simply have been banned.