Peter Ryan* says the Reserve Bank is warning that tighter lending standards will make it more difficult for property investors to extend the life of their interest-only loans.
Tighter lending standards are likely to make it more difficult for property investors to extend the life of their interest-only loans and leave some borrowers exposed to surging repayments, the Reserve Bank of Australia (RBA) has warned.
The RBA says the recent stance by the Australian Securities and Investments Commission (ASIC) that owner-occupiers should not have interest-only loans extended beyond five years could pressure household budgets when loans switch to higher principal and interest repayments.
In its quarterly statement on monetary policy, the RBA said a typical borrower with a five-year, interest-only period on a 30-year loan could see repayments surge by as much as 40 per cent if they refinanced to pay principal and interest.
The rise in repayments after switching from a typical interest-only loan of about $400,000 could be as much as $7,000 per year, the RBA warned.
“For such households, this is a non-trivial sum,” the RBA said.
“The affect on their consumption though will depend on the extent to which they have planned and provisioned for this predictable step-up in payments.”
While the RBA believes the number of borrowers unable to meet higher principal and interest repayments is small, it’s liaison with the market shows a few will need assistance in making the transition.
However, the RBA warned highly leveraged borrowers were most exposed and might be forced to sell their properties if they were unable to refinance.
The RBA said there would be greater exposure, “in the event of an adverse shock that led to a deterioration in overall economic conditions”.
Last year, the Australian Prudential Regulation Authority (APRA) imposed a “speed limit” on interest-only lending of 30 per cent of total residential lending in a bid to cool a hot real estate market in Sydney, Melbourne and Brisbane.
Forecasts unchanged
The quarterly statement painted an otherwise-rosy outlook for the Australian economy in which key forecasts were largely unchanged.
Gross domestic product was forecast to grow to 3.25 per cent by December 2019, with unemployment falling to 5.25 per cent and headline inflation rising to 2.25 per cent.
Wages growth is expected to pick up only gradually as the labour market tightens.
“The bank’s liaison suggested that a higher share of firms are now expecting a pick-up in wages growth over the year ahead although most still expect little change,” the RBA said.
It said while the current trade tensions between the US and China were “manageable”, it believed a further escalation in protectionist measures could harm global growth “significantly”.
“Global trade would therefore decline over time,” the RBA said.
“An adverse reaction in financial markets could also be expected.”
It repeated earlier messages that if the domestic economic outlook remained on track, the next movement in the cash rate was likely to be up.
“Notwithstanding this, the Board does not see a strong case for a near-term adjustment in the cash rate.”
The RBA said while the Australian dollar had depreciated recently, any significant rise might dampen economic growth and inflation.
* Peter Ryan is the ABC’s Senior Business Correspondent. He tweets at @Peter_F_Ryan.
This article first appeared at www.abc.net.au.
