Canstar group executive of financial services, Steve Mickenbecker explains why home lending conditions could be getting tougher for the sector
APRA's moves to limit growth in investment and interest-only lending have been with us long enough for the dust to settle, and as an industry we’ve been working through the reaction of lenders who used pricing to ‘ration’ lending in these categories. They went further than just repricing new lending, though, and also passed rate increases through to the back book.
The outcome has been that, from virtual parity a year ago, an investor paying interest only on a package loan with the major banks is now, on average, paying 104 basis points more than an owner-occupier paying principal and interest. An owner-occupier paying interest only is also on a higher rate, 56 basis points above one paying P&I.
Investors can’t avoid the investment loading. Unless they move into the house or sell it, they remain investors. However, the interest-only loading can be avoided by both investors and owner-occupiers by converting to P&I. The reality, though, might be that affordability will inhibit the ability to take on principal reductions, a likely reality for recent first home buyers in particular, for whom the out-of-cycle rate increase looks inevitable.
The complication to this has been that there is one group of lenders who have not had to react with quite the same zeal as the banks. That is the non-ADI group of lenders who are not regulated by APRA. I say ‘‘quite”, as the non-ADIs are still subject to ASIC regulation, as well as the overview of warehousing providers, end investors for securitised bond raisings and ratings agencies.
Irrespective of this, the outcome has been a pricing differential.
The loadings the big banks and the non-ADIs are applying to interest-only above P&I are not so dissimilar. Owner-occupiers with interest-only loans at the big banks are paying, on average, a 56 basis point loading, compared with 43 basis points at non-ADIs. Investors are paying, on average, 46 basis points loading at the big banks, compared to an average of 38 basis points at the non-ADIs. But that is where the similarity ends.
The major point of difference is with the loading for investors. At the big banks, an investor paying P&I can expect to pay, on average, 58 basis points more than an owner-occupier also on P&I, compared to an average of 35 basis points at non-ADIs.
Putting two layers of icing on the cake, investors on interest only at the big banks are, on average, paying 104 basis points more than the owner-occupier on P&I repayments. The same loading at non-ADIs is 73 basis points. This is probably the statistic that matters most.
Not surprisingly in light of these rate differentials, there is a belief that while the ADI sector has contracted lending in the areas targeted by APRA and has met and overshot targets, the non-ADI group has expanded in those lending areas. Of course, APRA reporting does not include the non-ADI sector, meaning that hard data is difficult to come by.
APRA is not taking that lying down, and the Treasurer introduced legislation in late March to provide APRA with powers to make rules for non-ADI lenders. Expect one ring to rule them all. The other point of interest is the average owner-occupier P&I rate, which could now be considered the base rate for home lending. It is 0.76% lower, on average, for non-ADIs compared to the big four average package rate. Non-ADIs have been able to maintain price leadership across all four lending categories.
The non-ADIs, largely dependent on wholesale funding, have been raising funds in a favourable mortgage-backed securitisation market for quite some time now. But rates overseas are on the up – 12-month LIBOR for March 2018 was up 95 basis points on the start of 2017. It is only a matter of time before securitisation issues come under pressure.
Conditions look likely to get tougher for the non-ADI sector on a couple of fronts in the not-too-distant future.
On the funding front, bankers have long understood the advantage of diversified funding sources, to avoid the boom or bust – remember the GFC. The challenge then for non-ADI lenders was how to diversify funding.
As for APRA regulation, it may be the solution, not the problem. Will it mean the boundary between non-ADI and ADI melts, potentially opening up new funding sources for the agile of the now-non-traditional sector? A question for another day.
Steve Mickenbecker
Group executive of financial services
Canstar
