When interest-only lending was capped early last year, regulators had one thing in mind: prevent housing-market risks due to a surge in investor lending. But the question remains: Has it been successful?
For Reserve Bank of Australia Deputy Governor Guy Debelle, the crackdown on interest-only loans has "meaningfully reduced" risks in Australia's housing market. Given that a surge in investor loans increases the probability of a housing-market overheat, putting a lid on interest-only lending was quite a strategic move by the regulators, Debelle said.
However, Debelle noted that risky levels of investor loans are unlikely to cause an economic crash.
"I don’t see the riskiness of the borrowing as being the source of the negative shock. My concern is for its potential to be an accelerator to a negative shock from another source. To put it another way, I don’t regard it as likely that household borrowing will collapse under its own weight," Debelle told Business Insider Australia.
Debelle also noted that the switch from IO to principal-and-interest repayments does not really represent a material risk to the economy.
NAB has already recorded $25.5bn worth of mortgages that were switched from IO to P&I since March of last year, with around a third considered as early conversions. Meanwhile, ANZ saw a big increase in early conversions over the past six months following its 30% cap on IO loans.
Figures from the two banks point to a still higher amount of IO loans expected to expire in the coming years. IO loans boomed around 2015 — with a five-year period, switches to P&I loans will be rampant until 2020.
“It is also worth remembering that this process has already been going for quite some time, but we have yet to see it have a material effect on arrears rates," Debelle said.