Interest-only mortgage refinancing failures skyrocket

With Australian property values falling for nine consecutive months:

Online mortgage marketplace, HashChing, is urging Australia’s financial regulators to relax mortgage standards:

Lending regulations have gone overboard, said Chief Customer Officer Siobhan Hayden said, and the tightening restrictions have, at times, become the reason for the unnecessary disapproval of loan applications.

HashChing’s recent broker survey showed that 73% of respondents believed most customers whose mortgages were changing from interest-only to principal and interest would opt to refinance.

Factoring in the new lending restrictions, 24% of the brokers surveyed believed more than half of these refinancing applications would fail. Additionally, 91% of the brokers said that they believed the public to have a neutral or negative view of the marketplace.

“With approximately $120 billion worth of interest-only mortgages converting to principal and interest mortgages over the next three years, it’s no surprise that 73% of brokers are predicting that most of the customers affected would be refinancing,” Hayden said.

For individual households, converting to principal and interest payments could drive mortgage repayments up to 35% higher.

“The tighter lending restrictions born out of the banking royal commission means we’ve gone from banks handing out home loans indiscriminately to rejecting loans unnecessarily,” Hayden said.

This is the interest-only refinancing cliff that MacroBusiness has warned about for months.

In a nutshell, Australia’s banks can only issue 30% of new loans as interest-only now. That’s roughly $40 billion per quarter, which would mean that the reset could absorb the banks’ entire front book interest-only capacity.

Therefore, some large portion will have to transpire in the back book. Our best guess how much that will be is based upon the history of what the banks have managed previously. We’ve guessed the banks will be able to manage some $25 billion per quarter in the back book as the great reset builds. That means we’ll see the following total resets to principle and interest:

At the peak, that’s 3-4% of the loan book being shocked by 40% repayment hikes. It’s big.

It may also be appearing in the major banks mortgage arrears which have a big jump recently in 90-day buckets (though overall levels remain low):

It also matters because the flow of investor mortgages is a key determinant of house prices growth, especially in the investor hotspots of Sydney and Melbourne, as illustrated clearly by the next charts:

Basically, falling investor demand means falling dwelling prices. And this is before Labor’s negative gearing and capital gains tax reforms are implemented, assuming it wins the next election, which will also smash the investor market.

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Comments

  1. People are arguing for apra to loosen up lending standards? That is not going to help. Only thing that can save these idiots is if apra allows banks to increase number of IO loans they can keep and issue.
    Even if apra loosen up lending standards and banks start approving P&I loans to all those people they currently reject, these people will simply default. The guy at my wife’s office simply says they can’t make repayments and they can only go to IO again or sell.

  2. sydboy007MEMBER

    me thinks the govt will step in at some point to you know maintain stability for the good of the economy.

    wont surprise me if the govt allows banks to rollover any I/O loan as long as not in arrears, or maybe to extend and pretend.

    • Extend-and-Pretend is the first option offered to borrowers going onto Scheduled Repayment that kick up a fuss. I’ll find out today what the next step is after rejecting that offer….( NB: This is an academic exercise for me, but if I don’t fight, who will!)

      • Sentiment noted! But being a shy sort of person, I’ll keep my dismay at current banking practices to ravings on this blog.

      • No, even better, have 16 children and then go on A Current Affair and claim the bank shouldn’t have made the loan, your neighbour is a sex offender, you’ve saved thousands a year on your electricity bill by going to a comparison website, and you’ve lost pounds by only eating purple food between the hours of 10.05 and 14.54. I love that show!

    • Yep, for sure there will be some measure introduced which will ease the interest only reset.

      • SupernovaMEMBER

        The ones resetting this year purchased their properties in 2013 so their buffer is considerable, but even of they decided to sell now they’d still be ahead taking a 15-20% loss. Still, I’m concerned with the current 90 day arrears already spiking up.

    • Legislating to extend IO loans is a can kicking exercise, and someone wanting to extend IO for another five years will simply have the same issue but worse in 5 years time. While our politicians are certainly stupid enough to do something like this, I wonder if they will actually recognise the issue? MPs won’t be the ones unable to roll over IO loans or struggle with P&I repayments, and may only act once a vast number of the electorate are having problems – and by then it will be too late.

  3. – I am increasingly less confident that Labour will implement those changes with the australian housing market getting deeper and deeper into trouble.

    • I believe you are spot on. Will be a watered down version. The other option is implementing the reforms and opening the gates further.

      • That’s my fear, immigration is already dialled out to 110, they’ll take it to new heights we can’t even fathom

      • – Just look at what Jacinda Ardern did in NZ. She also has “dialed back” her housing reform program (more than a bit).
        – See also my other comment in this thread. The Capital Gains Tax Discount “problem” will take care of itself with falling property prices.

    • McPaddyMEMBER

      If there’s any way this circle can be squared by crashing the AUD (thus preserving the hard earned windfalls of incumbents and f*ck the rest) it will be done. Average Joe too thick to understand theft via that route.

      • Exactly right. I pointed this out a couple of years ago as a counterpoint to MB cheering for lower AUD. The cheering continued and continues, so I don’t bother anymore.

        AUD will indeed be a mechanism (one of them) to keep the property infestors/landowning class ahead of the pack, at the cost of everyone else. The wealth relativities will not be allowed to reshuffle, even as everyone is made poorer.

        External devaluation will be (has been) chosen rather than internal revaluation.

      • Won’t that force higher interest rates , further accelerating problems for the indebted?

      • T: No. RBA will just lend infinite amounts to banks to allow current mortgages to be serviced.

  4. What wrong with you commies the toilet has to be flushed, capitalism at its best survival of the strongest, Darwinian, Free market let us Feed .

  5. Meh. So they have to sell at a loss and are on the hook for the difference. When you gamble on a continuing property bubble sometimes you lose. You can’t get the government to regulate away the laws of mathematics.

      • Yeah Turnbull’s a modern day King Kanute. Still he has lots of levers he can pull.

        The forever bubble will continue, and the government will change the rules to keep the bubble bubbling. Expect QE, easier loans and even some tax rules allowing doubling of negative gearing write offs.

      • reusachtigeMEMBER

        Mathematics is just a construct and in essence a law. We can always legislate to change the construct and hence the law. I don’t get why youse high-brow over-educated freaks can’t understand that! Oh, actually, probably for the same reason none of you have ever understood how to make profits from property investment because of your silly over-educatedness.

      • sisyphusMEMBER

        Marcus,
        except King Kanute did it to prove the point that he was NOT Godly … not sure our fearless leader have the same intentions

      • @Marcus. They need to make the NG deductabilty fairer for battlers though. For those earning less than 180k they should be able to deduct 3x their NG losses. Those over only 2x.
        Also introduce that profits from RE rental are only taxed at 50% like capital gains.

      • Nah. It’s morally wrong to incentivise battlers to take on extreme amounts of debt to gamble on loss making property schemes. Better to incentivise budgeting and saving, and investments made with cash.

      • Checked the date of the article – July 2017! Surprised to not have heard about this before, which just goes to show the free ride that Turnbull gets in the media. The man truly is an idiot.

    • Actually, they can.

      But, inexplicably, they have been sitting on their hands recently. It’s surreal. I don’t think it can go on much longer.

      • Well then! If Peachy in her new-found contrarianist persona finds it inexplicable – it certainly must be a puzzlement for the rest of us pedestrians.

    • 8317 in the early days of AI software was given trigonometric problems so the code writers could watch to see how the algos worked and this debug or write better algos
      Some of the algos proved trigonometric equations in a different method to the traditional methods used by all and gave many an insight into how other problems may be solved by AI, That was back in 1945 odd.
      Pi=3 wasnt one of em.

  6. mark777MEMBER

    Mate at work just locked in another fixed rate 2 years on his IP. Throughout the lender was saying couldn’t go any lower, until the end with my mate continually asking for a better rate he caved to 4.44% IO. I told him to pay down his principle but he is first paying off the OO mortgage. Makes sense.

    • I suspect a lot of younger people have bought two cheaper properties rather than go all out on an expensive property (i.e rent vesting in a way expect they own a much cheaper OO somewhere else for now for stability of tenancy). For them even if they are capable of making payments they won’t want to for tax reasons (i.e. your OO property is better tax wise). From a tax perspective it kind of makes sense assuming housing doesn’t fall. In some ways at least they have a tax cushion and rent buffer if it does. The price is CGT if they sell up since they rented it and make a profit but then that’s a problem people want to have I guess.

  7. Can anyone provide arrears data for the small banks? Surely this issue is magnified in the lenders of last resort?

  8. – As property prices fall more and more the (financial) benefits of the Capital Gains Tax Discount will shrink as well. A significant part of those (paper) “gains” will turn into losses. And I fear it will happen at a much higher pace than people dare to contemplate. So, the next government wil be able to get rid of that without too much financial pain.
    – Negative Gearing is a different story. That is something the/a next government is going to haunt.

  9. We have arrived at an inflection point. A major, rolling refinance exercise in which the bank have fine grain data about borrowers’ financial affairs due to fuller and more accurate disclosure. They will use this information to perform triage on this disaster scene. From banks’ perspective, the 30% as IO loans rule allows sufficient credit flexibility for the exercise.

    *Those who will survive go onto P&I and are screwed for cashflow.

    *Those who might survive will be reoffered IO with a P&I element so they begin principal repayments to the limit of their capacity and are screwed for cashflow.

    *Those who demonstrably lack the equity and labour income to support existing loans will be confronted by their folly – not by the bank, but by the evidence before them in their own threadbare mortgage application. They must sell.

    This liquidity-out phase will happen alongside owner-occupiers switching focus from thoughtless consumption to determined principal repayments (good luck trying to make a meaningful difference on debt 6x to 8x incomes)

    We have been very rude about the role banks played in this land bubble. Yet that is like blaming car salesmen for the two Audis in every driveway phenomenon. Instead, decry the impulse deflecting entrepreneurial activity from accumulating capital as risk-bearing equity in the businesses of this country to rent-seeking in residential property – earning a gross 2% in rents and netting half. What were they thinking?

    • McPaddyMEMBER

      In that scenario the employment shock will be a doozy, feeding into the downward spiral.

    • and all this without external shock. what happens when something snaps out there? IR are at 1.5% already.

    • SoMPLSBoyMEMBER

      Well phrased!
      And the big surprise for many will be the unexpected “sorry, we gotta let you go” talk as 1000’s of equally overextended small biz owners rally to boost their own cashflow obligations. The frontline employees who make the sprockets turn will be better protected than the chubby layer of middle manager types who will find they really are expendable.

  10. “HashChing’s recent broker survey showed that 73% of respondents believed most customers whose mortgages were changing from interest-only to principal and interest would opt to refinance.”

    In other news, it turns out the bear does, in fact, sh!t in the woods.

      • Tax wise with our current system it always pays to have an IO loan; if you want to pay it off early use an offset account. Not saying I agree with it – that is the way it is however. Repaying the loan directly limits your potential tax deductions and any flexibility in property use in the future. This also goes for a owner occupied property that may ever become a rental – hence a lot of people get IO with offset even for their principal place of residence just in case they want to rent it and put the money onto another OO at some point.

  11. All part of the major banks plan to profit:
    – IO loans are rolling off.
    – Know which clients can’t refinance these IO with other banks as they are over the 6* DTI limit
    – Roll them over into the standard investment P+I rate of ~5.80% without any discounts!!!

  12. Warning, the following may cause some MBers (other than Resua) to put their fists through their computer screen …

    https://www.domain.com.au/advice/how-to-get-the-best-result-from-your-valuation-when-refinancing-even-if-the-property-market-is-falling-20180708-h11k0b-751577/

    But the situation might not be as dire as it sounds, as declines in values could be exaggerated by the valuers themselves, according to Anna Porter, founder of property advisers Suburbanite.

    “When the market moves, the valuers might get nervous and overstate the facts,” she said, adding the high volume of work could cause valuers to rush the job. “Valuers are getting overworked by the banks. There’s more room for error.”

    Ms Porter highlighted an “experience gap” in the valuation industry, pointing to the fact that many valuers hadn’t experienced a downturn first-hand, and were prone to exaggerating the effects a slowdown in the broader market could have on property prices.

    “We work with brokers to review valuations because there’s a need for it,” Ms Porter said.

    Making simple and cost-effective home improvements such as tidying up yards and painting walls or installing built-in wardrobes before valuation can improve the result, according to Ms Pretty.

    “It may also be helpful to be present when a valuer visits in order to point out the improvements that may not be immediately apparent such as solar panels on the roof which may be obscured by trees.”

    So if a valuer says your property is less than you think or dream it is worth, that’s an error because the valuer does not know what he/she is doing? But if the valuer overstates the value – that couldn’t possibly be wrong could it ….

    Devoid of better things to do I wandered on to the website of that spruiker and was dumbfounded. Is this what we have now, a sector of the industry set up to charge fees to help deluded underwater property owners fight banks on valuations? So they can draw every last cent out of the property to spend, or invest in something else? Because, you know, going down the alternative path of actually paying off some of the loan is for bitter loosers (cf losers) like MB commenters?

    Straya, mate.

    • darklydrawlMEMBER

      Yeah, I read that the other day and thought the same thing. Increase = accurate valuation. Decrease = valuer is a nervous and unskilled idiot and should be ignored. Who can honest say that with a straight face, let alone in a public domain as a ‘fact’?


    • “It may also be helpful to be present when a valuer visits in order to point out the improvements that may not be immediately apparent such as solar panels on the roof which may be obscured by trees.”

      Definitely if you have a median Sydney house (cf. dwelling) that was worth more than $1.1 mill this time last year, and has since fallen by the median amount of 6.2% per Corelogic June results, pointing out a solar system that’s been in the weather for several months should make all the difference.

    • “Valuers are getting overworked by the banks. There’s more room for error.”

      Bull-sh!t. Just went through the process of getting conditional finance and was told that unconditional, including valuation, could be fast tracked to “under two days” Why? Because they are quiet, dead, and that goes for the whole sector, they are just twiddling their thumbs. This is what is happening, a collapse in demand for the services banks offer in relation to property purchasing.

    • Yes – I read that the other day. However – this will brighten your day to no end (from the AFR) (ROT13) Ghea bss Wninfpevcg gb npprff gur negvpyr va vgf shyy tybel. Guvf jbexf sbe nyy NSE negvpyrf – sbe abj. (/ROT13)

      https://www.afr.com/real-estate/residential/vic/rival-real-estate-agents-in-melbourne-trade-assault-and-death-threat-allegations-20180709-h12gz4

      This is the music I like: punchy and a little bit stabby! I’ve always said that I’d pay to see real-estate agents shiving it out in a dark basement. Plexiglass walls and night-vision goggles for the spectators.

    • Locus of ControlMEMBER

      Gawd. You had me intrigued so I visited the Suburbanite website and it was like stepping through the looking glass to Entitlement Land. I half-expected to see the Cheshire cat or a Mad Hatter or a white rabbit. Is this the land that Reusa occupies? It sure is magical…

      https://suburbanite.com.au/#have-a-valuation-reviewed

      Have you recently had a valuation done on your property by your bank or lenders valuer and the numbers just don’t stack up? Perhaps you have had a land tax valuation done and you feel it is far from the mark.

      Translation. Value came back short but you want to redraw/ banking on equity for renovations? Call us. Value came back too high in the context of tax? Call us.

      This is everything that’s wrong with Australia.

  13. Terminology request from the non-banker: What is back book and front book? Is it something to do with when the loan was issued and whether or not the mortgagee has re-financed?

  14. Mother in Law showed me a house last night in Wangi Wangi (Lake Macquarie NSW), which was asking about 550k and went for slightly over 100k less. We still can’t work out if its typo. The listings around it on that page however were all selling for around 15k less than their asking price. Anecdotes I know but still. On a personal note, I notice some people are staring to quietly ask me my opinion on Australian housing rather than lecture me like I’m a total r#t#rd. Which is nice.

    Also shoutout to Peachy. Peachy, you are a “Despair Bear”. You want it so bad you can’t allow yourself to believe you might get it. I know the feeling my friend. Just rroolllll with it.

      • I like “despair bear” too, possibly more gab RR’s “bull-bear”, in terms of the level of verbal flourish.

        But I think that they have different meanings. While I might be a bull-bear, im not a despair-bear. Because I’m set up just fine for the current conditions and am privately balancing the books against the government/housing complex. This can continue indefinitely and I’m sure that I will give as good as I get in terms of financial rape.

        Keep it real, sistas!

      • I look forward to the following care bears characters to be assigned to MB commentariat denizens:
        Don’t Care Bear
        Intensive Care Bear
        Aftercare Bear
        Scare Bear
        Carefree Bear

    • similar thing here at Middleton Grange. Has not sold yet but a house that would have sold between $1.05m – $1.15m is listed for $880k. I know prices are down and very few of those houses (only one few months ago) manage to sell for over $1m and rest sell for around $950k +/- $20k but these guys listed the house bit too low from what they sell.
      Unless they are really stuck and can’t refinance with anyone..

    • Interested in this. I’m in Newcastle and my gut tells me prices are off slightly, but can’t quantify (and Corelogic is saying otherwise)
      Also, my brother has just signed on the dotted line to build in “MacArthur Heights” (Near you Nikola) – I’m worried for him…

      • Also in Newcastle, have been checking daily for the past 18months for anything that comes up under $550k (first home buyer). Starting to see more and more property’s come up in areas that we’d usually be priced out of. The main thing I’ve noticed is the amount of houses up for rent. 2 years ago we struggled to find a house with 3 bedrooms under $400 a week in newcastle or lake Mac. Now theyre everywhere and we’re tempted to upgrade to a nicer place when the current lease runs out.

      • Newie! ahh Newie, late to the party, Newie will keep rising well into the crash as all the Sydney economic refugees scramble their way up the coast and bid Sydney prices for Newcastle real estate…! But it will fall eventually. Newcastle has seen ridiculous rises over the past 5 years, I reckon its peaking about now or close to it

      • Also in Newie. Agreed there seems to be an increase in rentals. Also a LOT of commercial real estate for sale or lease. Local economy of looking pretty cactus?

        Check out ITC (Industry Training Consultants) on twitter. He chats to a lot of local agents, and apparently they’re starting to shit themselves that the downturn is starting to hit Newie now.

    • SupernovaMEMBER

      Caution: Unless you attended the auction, you really don’t know the selling price. With private sales, RE agents conduct shadow auctions inflating prices using any means at their disposal; they are anything but honest! The price RE agents publish is not always the sold price as their is currently rampant corruption in the industry as prices decline.

  15. Don’t worry the RBA and APRA will step in. Not that they’ll need to because the fundamentals are compelling and we have huge immigration and Kangaroos. From the Herald Sun (paywalled);

    ‘DON’T SWEAT FALLING HOUSE PRICES’
    HOUSE prices are falling but we need not worry, according to a leading investment expert. The RBA and banking watchdog can — and will — step in to prop up the market if necessary, he says.

    Again I ask, if the fundamentals are so good, why are we propping?????? First our banks were the most stable, robust and honest, now we learn they’re just a sack of sh1t. Next our market was the best on the planet, underpinned by solid fundamentals, now we learn it too is just a sack of sh1t. The trend keeps rolling on.

  16. Perhaps had the correct standards been applied in the first place…. well we would not have these issue and the mess we currently are in.

  17. a WA example:

    I was just granted a 5 year extension on my IO loan which was to expire next week (5 more years of IO)…. its only a small one, ~ 300K….. however the interest rate just went up 0.3% to about 4.6%p.a.

    I was surprised the rate went up so sharply, I have very low debt and reasonably high income etc. (this is NAB) – So in actual fact, it appears the big 4 are already raising rates! And cunningly without the MSM headlines

  18. https://www.afr.com/real-estate/offtheplan-parramatta-apartment-loses-value-before-lived-in-caution-on-pricing-from-valuers-20180710-h12iz3

    They are described as “sun-kissed apartments” in “the heart of all the action”, “perfectly positioned to cater to your every connectivity and lifestyle needs”

    With Westfield Parramatta at your doorstep “you will love calling this sunlit space home”.

    But when the apartment market turns, no amount of property spin will save an off-the-plan buyer from negative equity.

    A two-bedroom, two-bathroom, 71-square-metre apartment in the high-rise apartment tower Skyrise purchased off the plan in May 2015 for $767,000 has just been valued for the bank. The valuers JLL have confirmed in a valuation report viewed by The Australian Financial Review that the new value is $720,000. A discount of more than 6 per cent over a three-year period. And the apartment is only just ready to be lived in.

    Parramatta is ground zero for population growth in this country and interest rates at at record lows and Morrison reckons we have a booming economy with endless job creation.

    So what number do the valuers write down when things actually start going off the rails?

    But seriously now:

    The drop in valuation at the Skyrise apartment tower is not entirely surprising given that the project’s Mandarin-speaking marketer Macland Investment Group has indicated previously that developers it represented had been offering discounts of between $20,000 to $40,000 for $800,000 two-bedroom apartments.

    Wake me when there is another zero on those discounts, boys. Or, as they say on the mainland: 他媽的你


    • The drop in valuation at the Skyrise apartment tower is not entirely surprising given that the project’s Mandarin-speaking marketer Macland Investment Group has indicated previously that developers it represented had been offering discounts of between $20,000 to $40,000 for $800,000 two-bedroom apartments.

      It always seem funny they call that lower price a discount. If you buy, say, copper, at the LME price (+ agreed margin) and it’s lower than what you would have paid last week or a year ago, it’s not a discount – it’s just the new price.

    • “sun-kissed” my arsë… more like “sun-blown” – considering the heat-island effect.

  19. Yep, 他媽的你 our federal government and their 他媽的你-up mass-immigration program! Absolute tossers #DickSmithforPM

  20. It might be that this is the beginning of the end. This experiment (1997) is now an adult and it’s about time to stop. I think that you guys should stop analysing everything in details and come back in two-three years time just to check, with no rush to buy anything.
    In a meantime, go and see some churches in Europe or boost your confidence in Pattaya and try to be good in whatever you do for a living.