Is cheap always the best?

Money is cheap and there’s lots of it around.

But will authorities change lending rules?

In my last email, I spoke about the record-low interest rate and the relationship this has with the currently burgeoning property market. More available money leads to higher prices which leads to borrowers looking for more money to afford their preferred housing requirements.

And the cycle goes on.

Where it becomes a concern is when the lending regulators perceive the proportion of ‘high risk’ loans as such that it requires intervention to prevent a flood of mortgage defaults.

Data from the December quarter shows that there was a slight increase in the number of high-risk loans during that period. However, despite this, APRA has so far refrained from tightening the lending rules again, saying they saw no evidence of a “material relaxation in lending standards”.

Interest only loans have drawn the most attention from the regulators. The portion of new mortgages lent on interest only terms hit 19.2% in the December 2020 quarter, up from 18.5% in the previous quarter but still well below the record high of 45.6%, which was recorded over the June 2015 quarter.

In 2017, banking regulators stepped in to tighten lending criteria in an attempt to slow down the then rapidly escalating property market. At that time, it was becoming more common for borrowers to originate their loans on interest only repayment terms, or refinance and extend their interest only term period. This was leading to a delay in the paying down of loan principals.

Interest only loans are usually favored by investors but the proportion of investors in the market is relatively low. It is therefore the interest only loans to owner-occupiers that will be most scrutinized. A rise in interest rates could place upward pressure on household debt levels if these mortgagees continue to not pay down their loan principal.

As housing prices rise at a time when incomes are expected to remain relatively flat, there is the potential for both loan-to-income and debt-to-income ratios to lift. The latest data from APRA however, indicates there is no blow out of risk in mortgage lending. This followed the recent address by the RBA governor reiterating that they intend to maintain a low cash rate for years to come.

However, we have seen in the recent past that financial regulators can step in and implement strategies to mitigate any financial stability risks related to the housing sector. For now though, whilst APRA’s December quarter statistics show a trend towards ‘riskier’ styles of lending, the extent of it is not likely to be large enough to trigger a regulatory response.

If you are thinking of selling, now is one of the best times to start the conversation and planning. Our market conditions are unique right now and perfect to take advantage of.

We achieve our strongest results by following a proven strategy, tailor-made to your situation. Take the opportunity to gain from this advantage and my expertise and contact me now.

If, however, you or anyone you know would just like to discuss the current value of your home and the best strategy to get you the best price when you come to sell, you can contact me any time.

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Published August 24, 2021

By Belinda Cassano