Lending trends
In part thanks to the stimulus packages and the introduction of mortgage holidays, thankfully Australia came through the pandemic period relatively unscathed as is relates to mortgage arrears.
Of course, arrears will now rise from all-time lows as interest rates have increased from near zero to a cash rate target of 2.35 per cent.
That said, the unemployment rate is typically the biggest driver of arrears, and if stressed credit is allowed to run off into the interest-only basket then there needn't be an unseemly spike in arrears.
APRA data for June
The stock of interest-only loans fell to a record low of 11 per cent of outstanding residential term loans in the June quarter, a huge and ongoing decline from the high of 39 per cent in 2017.
One of the ways in which the so-termed 'soft landing' can be achieved is through allowing stressed borrowers to switch to interest-only products for a period of time.
The share of new interest-only loans in the market has now increased from record lows, so there is an obvious potential safety valve here.
As noted previously, one of the major challenges at the moment is that so many borrowers are trapped in a mortgage jail on poor terms, due to the extraordinary 300 basis points lending assessment buffer.
This 3 percentage points lending assessment buffer was required in 2021 to curb a frenzy of borrowing, but now the opposite dynamic is in play, and the buffer should be lifted.
The share of high LVR loans (>90 per cent) fell to just 6 per cent in the June quarter.
There is still some high debt-to-income borrowing happening, although this is also on the way back down now.
The wrap
Two observations from this data series, then.
Firstly, the return of interest-only lending can act as a safety valve for stressed borrowers as fixed rates reset, if required.
And, secondly, with the cash rate target now back in the neutral zone at 2.35 per cent, the extraordinary 300 basis points lending assessment buffer is unnecessarily stymying the flow of credit.
It has served its purpose now and APRA should scrap it.
