An interesting tongue-in-cheek (I think) question from Cameron Kusher today:
The volume of interest-only (IO) mortgage lending in Australia has been decisively quashed, it's true.
Volumes haven't been remotely as low as they are today across the entire data series.
And an interest rate differential between products encouraged a good deal of early switching to principal repayment too, to the extent that at the time of writing in July 2019 the stock of IO loans is probably approaching just 21 per cent of the mortgage market by value, also a record low.
That represents a dramatic shift in only a couple of years.
That represents a dramatic shift in only a couple of years.
Meanwhile low-doc lending has been all but eliminated, and high-LVR lending was wound back beginning some years ago.
The riskier parts of the lending market were decisively tackled some time ago, then.
However, the impacts of so many loans switching across to P&I in such a short period will be felt for some time to come, as this dynamic sucks dollars and therefore consumption out of the economy.
Furthermore, some borrowers will find the transition difficult, most notably where the economy has been weaker (and especially for borrowers with more than one loan switching to principal repayment).
Several of the regulatory caps have now been lifted, but still some ongoing challenges remain to be played out in full.
Living expenses
A critical outstanding issue with regards to mortgage lending relates to the treatment of household expenses.
Expenditure benchmarks were previously used by lenders - and in the main they served their purpose well - for the obvious reason that historic expenditure may not reflect future spending patterns even immediately post-purchase, let alone 5, 10, or 20 years down the track.
We're in the immediate aftermath of a banking Royal Commission, though, and in the midst of the confusion and paranoia lenders have often failed to distinguish between the analysis of discretionary and non-discretionary expenditure.
This lacks common sense and is doing nothing to reduce risks in the market.
Instead the process has long since degenerated into a line-by-line audit of bank statements, in the misguided belief that this is achieving anything worthwhile in terms of mitigating risk (if anything it's doing the opposite).
This lacks common sense and is doing nothing to reduce risks in the market.
Instead the process has long since degenerated into a line-by-line audit of bank statements, in the misguided belief that this is achieving anything worthwhile in terms of mitigating risk (if anything it's doing the opposite).
A commonsense approach would be for assessments to take account of living expenses that are genuinely essential and non-discretionary, and isolate those that could be wound back easily if required.
With the technology so readily available today it's not as though this would be difficult to do.
I noted a few more general thoughts on mortgage markets and risks in the video below.
