The Reserve Bank of Australia (RBA) recently issued a stern warning to mortgage lenders, saying any change to interest rates could jeopardise the country’s fragile economic growth.
As was anticipated by a dozen economists, the RBA chose to keep its benchmark interest rate steady at a record low of 1.5% at its April board meeting on Tuesday.
During the RBA Board Dinner, Governor Philip Lowe expressed concern about the nation’s soaring house prices, saying it was pushing up the household debt to income ratio, which was already at a record high earlier this year.
“Too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” he said. “In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong.”
Lowe asked lenders to ensure that the serviceability metrics they use are appropriate for current conditions. He also called for a reduced reliance on interest-only home loans in the housing market.
Nearly 40% of mortgages approved in the past year have not required the scheduled repayment of even one dollar of principal in the first few years of the loan, only interest payments—a highly unusual practice by international standards, said Lowe.
The governor welcomed the Australian Prudential Regulation Authority’s new limit on interest-only loans to 30% of new mortgage lending, and approved of the tighter monitoring of lenders and brokers by the Australian Securities and Investments Commission (ASIC).
“A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience," Lowe told attendants at the RBA Board Dinner. “With interest rates so low, now is a good time for us to move in this direction.”
Gareth Aird, senior economist at Commonwealth Bank of Australia, said the Reserve Bank was unlikely to tamper with interest rates, as it is trying to balance financial stability with sustainable growth.
“The competing forces of below target inflation and soft employment growth against rampant property markets in Sydney and Melbourne mean policy is on hold for the foreseeable future,” he said.
Collections: Mortgage News