APRA data show home loan growth, interest only surge

By business reporter Michael Janda

The latest APRA residential lending statistics show a strong shift towards riskier interest only loans.

Banking regulator, the Australian Prudential Regulation Authority, has found that the value of interest only loans grew at more than 14 per cent over the year to September 30.

That was noticeably faster than the 9 per cent rise in the value of home loans overall.

In the September quarter, 42.5 per cent of total residential loan approvals were interest only, highlighting the growth of this segment.

The outstanding balance of interest only loans is now $446 billion, more than 36 per cent of the $1.23 trillion of housing debt on the books of substantial institutions (those with more than a billion in loans outstanding).

Moreover, the average outstanding balance of an interest only loan is $308,000, much higher than the average for all home loans of $239,000.

Interest only loans are riskier for both the borrower and the bank because the principal is not being paid down.

For the bank, this means that the original deposit is the only security the institution has against a fall in the property's value if it has to foreclose the loan and sell it.

For the borrower, the risk is twofold: the first is the prospect of struggling with repayments once an interest-only period ends and they also start paying off principal; the second is that they may be forced into bankruptcy because they still owe the bank money if the property's value has fallen below the deposit they put down.

The good news in the data is that banks have wound back slightly on extremely high loan-to-value ratio (LVR) lending.

The proportion of new loans being issued with a deposit of less than 10 per cent has fallen to 12.1 per cent from 14.1 per cent in the September quarter last year.

However, the proportion of high LVR loans with a deposit of just 10-20 per cent has crept up from 20.6 per cent to 20.9 per cent.

Strong home lending growth

Of further concern to economic policymakers would be the large increase in housing debt relative to the modest increase in household incomes over the past year.

Residential property loans outstanding rose 9 per cent over the past year, while wages grew an average of just 2.6 per cent.

Australians now owe $1.25 trillion in housing debt to banks, credit unions and building societies.

The main factor behind the increase was an 11.9 per cent surge in investment housing lending compared to a year ago, while owner-occupied lending grew a more subdued 7.6 per cent.

While investors make up just over a third of outstanding housing debt overall, they made up 37.4 per cent of the value of new loans over the past quarter.

Investors are also a key reason for the surge in interest only lending, with many banking on capital gains for their investment profit while claiming negative gearing income tax deductions for their interest and other rental costs.

The Reserve Bank has recently repeatedly highlighted its concerns about the steep rise in housing investment loans, particularly interest only mortgages.

The bank fears that it is exposing investors to potentially large losses, and therefore risking the future health of the economy if people have to cut spending on account of investments going bad.