No further tightening proposed
It looks as though tighter deposit requirements have run their course.
Although December 2018 was a horrible quarter for mortgage lending in the lead-up to the end of the Royal Commission, the squeeze on loan-to-value ratios looks to be just about done.
There are relatively few interest-only (IO) mortgages being written now, and this squeeze also looks to be about done.
It's a smaller share of a smaller pie, and this is reducing household debt ratios as we speak (contrary to the incorrect claims you might read elsewhere).
The ADI stock of outstanding IO loans is now less than ¼ of mortgages by value, the lowest on record across the data series.
This may sound a lot, but most IO loans revert to principal repayment relatively quickly, and anyway IO mortgages can make a lot of sense for borrowers with offset accounts.
Many borrowers have opted to revert to principal repayment early for the cheaper mortgage rates on offer.
There was previously some debate surrounding what constituted a 'new' IO loan, but the interest-only 'cliff' is no longer a thing, since any mechanically forced reset no longer applies.
It's in nobody's interests to see stressed borrowers go into arrears, so the reset should now be managed comfortably enough.
Left the building
Left the building
It's interesting to note that partly thanks to switching across to cheaper rates, interest repayments have now declined to sit well below 10 per cent of household disposable income, down from 16 per cent a decade earlier.
This is a very significant decline, and this hugely improved level of mortgage serviceability partly accounts for why mortgage arrears remain so low.
Betwixt the Council of Financial Regulators and the Reserve Bank today the respective authorities confirmed today that there would be no further tightening of lending standards required, instead perhaps implying that banks rather need to write some business.
From the RBA:
"From a financial stability perspective, prudent lending standards are a good thing. They ensure that households and banks are resilient to changes in circumstances.
But there needs to be a balance. The regulators are not proposing any further tightening in lending standards.
And the appropriate amount of credit risk is not zero – banks need to continue to lend and that will inevitably involve some credit losses."
Welcome news, while fixed mortgage rates are being cut widely as funding costs have declined.
The regulators have left the building (for the time being!).
