Westpac tightens on interest only mortgages again

From the AFR:

Westpac is toughening lending conditions on investment property loans, the third change to its mortgage products in three months because of growing regulatory pressure to clamp-down on interest-only products.

…Westpac is reducing the maximum allowable interest-only term for investment property loans to 10 years. The interest-only term could previously be extended to 15 years, according to brokers.

In addition, the 12-year fixed rate investment property loan and its low documentation equivalent will no longer be available. The changes also apply to all special borrower packages.

…Christopher Foster Ramsay, principal of Foster Ramsay Finance, said during the past six weeks some lenders had “stopped aggressively going for market share” by trimming margin discounts and tightening terms and conditions.

Comments

  1. Interest only for 10 years….. what will happen after 10 years?

    Oh, I got it. Refinance with another interest only loan for 10 more years!!

    • some UK experience here might help – after initial interest only period (eg. 3-5 years, certainly not anything near 10 years) they have to go onto at least the standard variable principle and interest mortgage. Almost impossible to refinance interest only again after a first attempt

      • I am just trying to gauge how desperate the banks are. I mean, it would be self-defeating for the banks to tighten the screw because tightening credit will lead to falling demands and falling house prices (asset books).

        If the banks have to do this knowing that it would be self-defeating (collectively for the sector) because either they have no choice or they just want to get out before their peers do (i.e., rush for the exit), then you know the time is ripe for shorting them.

        http://www.macrobusiness.com.au/2016/10/clsa-keep-sellin-dem-banks/#comment-2719444

      • in practice there are competing forces internally in all the banks. The risk guys will be angling for a severe pull back (via increase in lending standards) whilst the sales/operations guys will be arguing for a continued pedal to the metal approach (increase market share). A lot will depend on who has the bigger political weight internally and what the incentives are internally. I can pretty much guarantee no-one sits around pondering the very high level issue you raised (ie. the ovrall size of the market and its direction and that is a shortcoming that they don’t). Certainly no one acts on the issue after pondering it at such a high level.

      • Um, interesting. The Moron Side surrounds the banks – perhaps their decision making is based on what the next guy, I mean bank, does? Then all you will need is the first domino to fall and the rest will take care of itself.

    • That is not what the article meant.

      Currently you can only have IO loans for 5 years, but you can refinances two more times for a grand total of 15 years.

      This change means you can only refinance once for a grand total of 10 years.

      Of course there is nothing to prevent you going to another bank after the 10 years is up. Banks don’t seem to talk to each other. You can even use one wage to borrow the max amount, then go to another bank and use the already committed wage to borrow for another property for another maximum amount.

    • This is how it starts. Just like the Big short.. A bank sees growth limited but the downside enormous so they start to tighten on the most risky side of their balance sheet. One bank has to move first, then other banks do this. This effects wealth for those people and the suburbs where they tighten and this causes more loans to go under, losses on banks, less spending… Already happening for mining states as well as apartments in all states. I can already see fires spreading but they are only in pockets in the eastern cities and the prices going up are offsetting the decline for now. Maybe we have another leg up in property prices to go but China is tightening on property and we have a big apartment oversupply. The next crunch will come.

      • Exactly. In the past, the banks have avoided doing this for exactly this reason. IMHO, the change this time around is due to the regulatory bodies taking notice and also the supply response. The banks are scared that they will loose out regardless of whether they tighten or not because the supply response has been massive!

      • It’s a little more than token. Reducing the loan term signals that a correction is possibly closer than we think. You can’t refinance if your valuation decreases, especialyl if you are doing the investor thing and leveraging up to the maximum. 5% drop will require a fresh 5% cash injection, or you start paying principal.

        Also consider the interexchange of banking customers. You don’t want to be the bank with the most lax policies holding all the risky loans when it goes down.

      • Or inherent in interest only is the assumption that the investor can earn a higher return on the capital repaid through principal repayments than what the bank could
        BUT I don’t regard australian property investors as that brilliant that they could do that on mass

      • Get real.
        Interest only has been available from a variety of bank and/or non-bank lenders for an extremely long time.
        I bought a unit in about 1983 on interest only and refinanced it several times until paying it off.
        There will always be lenders of interest only funds at rate eg bank term deposit rate for 3 years plus say 2% and a loan security ratio eg 80% of a valuation for mortgage purposes.
        I have both borrowed and lent funds on this sort of basis.
        It’s got its risks for both sides, but it is no more part of the ponzi than any other credit provision. You could argue that the loans supported by lenders mortgage insurance provided by banks are the biggest part of the so called ponzi.
        Like any other borrowing situation, heaven help you if you are in breach of your payments or LSR after a revaluation during a recesssion.
        Contractual rights of foreclosure are a risk for the borrower in some private loans.

  2. What sort of sadistic banking regime is this that allows investors only 10 years of forgoing principal repayments. Just 10 paltry years. The humanity !

    But seriously, this is just another sign that from a policy point of view, we are baking in high house prices.

      • Absolutely Travis, but all this so called “investment” is predicated on the assumption that Australian houses will keep climbing forever. This will obviously meet the force of gravity sooner rather than later

    • You can’t “bake in” high prices unless you have high inflation. With salaries edging downward and inflation comatose the only thing they are “baking in” is a collapse.

      • Nope, you bake it in with high immigration, low interest rates, easy credit and tax incentives. We’ve baked in this much paper asset wealth without the help of high inflation and wages growth.

      • Green, I disagree. Australia literally mortgaged itself against a “century of mining”. Even the high immigration was due to this. Without this collateral, you can extend and pretend for a period (pretty much since 2013 with the whole surge of the service industry, “food bowl of Asia”, “knowledge economy” and other choice marketing BS) but hope (or “innovation” TM) is not enough. Eventually your debtmasters (remember, Australia is externally funded) will start asking for premiums, the government will increase taxes (they already are) and watch as money velocity breaks down. Without a wall of money coming in to shore it up, I don’t see it “baked in”.

  3. Most contributors to this site have not experienced first hand what actually happens when the lenders security starts falling away and you are forced to remortgage. In such situation you really discover what sort of total assholes panicky money lenders turn into. Cast your eyes over areas where this has already happened, like Perth, mining towns or the Gold Coast and you’ll soon realise what sort of joy it must be to have an interest only mortgage or indeed any other mortgage which must be refinanced in a disappearing market.

    • Hey Pantone. Looks like something will happen to SLX real soon, hopefully positive. The DOE will have to decide about the licensing deal of Paducah in one way or another by the end of November (the DOE has a loan facility so GLE can go ahead without a new consortium of investors if it chooses to do so). The other one will take longer as it will never fly without a new consortium of investors.

      Meanwhile, the IQE stuff is looking more and more promising by the day. They got till March 2018 to opt for the translucent technology.

    • You vastly under estimated the number of investors using this strategy to buy properties over the past several years.

  4. Why is this even being discussed ?
    Did you all not hear that an irrelevant minor 5th rate celebrity was robbed in Paris the other day. Why are you not all concentrating on that ?

  5. To play devils advocate, one might argue that moves like these make the system safer, and actually encourage people to borrow.

    • + 1 and also, there is no mention of offset facilities that most of these IO loans comes with so buyers can still be saving even though they are on a RISKY IO loan. I’m doing that with my PPOR for personal cashflow purposes.

      • would be good to see a regression of dollar notionals in “interest only + offset” verses “interest only no offset” over the last 10-15 years
        the cynic in me says that as prices have skyrocketed that a material amount of mortgages written over that period either could not afford principal and interest from the outset or started out as principal repayment but were moved to interest only because of arrears

    • Ahhh yeah but that doesn’t play into the MB narrative that the sky is falling and that we are just on the edge of a major bust… While interest rates remain persistently low, inflation is nowhere to be seen and central banks refuse to go below 0 but also raise above 0.5% I don’t see how things are going to change in the short term. Add Chinese buyers from Canada who are now being encouraged here. Probably plugging settlement gaps etc.. It’s boom times ahead.

      Just ask Reusa, we have a long way to go before the majority of property have not’s outweight the property have’s. Until we reach that turning point policies won’t change, because most Aussie’s will continue to vote for higher house prices.

    • Indeed. Must be why 90 day RMBS are higher now than the GFC and no sign of a top in sight …

  6. Sure, the trend is your friend until the bend at the end. I remember the same twaddle being peddled why stockmarkets were overvalued and continuously heading North. It was called the “weight of money” argument.
    No wonder economics is called a Pseudo science!
    P.S. Chinese have already sent a shitload of money down the toilet when they bought in mining towns, Perth or Darwin with a small deposit, not to mention Vancouver or our East Coast apartments

  7. what if you do interest only for 15 years, then switch the banks again and again….the concept of IR only loan should be banned…