In one fell swoop, ANZ Bank (ASX: ANZ) has revealed how Australia’s mortgage market is increasingly being priced by safety.
If you are a low risk customer on a solid income with a substantial deposit somewhere north of 20 per cent then you would have been delighted with the news that ANZ had reduced its variable interest rate for new loans down to 3.65 per cent, down 0.34 percentage points from its previous offering.
Interest only borrowers facing tough times
One group who would not be delighted with the news would be the very large number of people who have interest-only housing loans that expire over the next couple of years.
For the vast majority of them with large loans and low deposits, they will be having a very different conversation when it comes to refinance their loan – predominantly on to a principal and interest loan with substantially higher repayments.
Rolling over to another interest-only loan will probably not be an option and if it is the interest rate will be eye-watering.
Already interest-only loan interest rates have been rising as owner occupied principal and interest variable loans have been falling or staying steady, increasing the disparity.
Adding to the pain is falling property prices, which in Melbourne and Sydney in particular will have the perverse effect of increasing the loan to value ratios at the worst possible time when borrowers come to refinance.
Selling out is not a very attractive option either, with confirmation that the Melbourne market is now falling even faster than Sydney.
Safe borrowers get honey, existing borrowers get birch
Interestingly, the ANZ Bank mortgage rate cut comes at the same time as a brace of smaller banks including the Bank of Queensland, Suncorp, Bendigo and Adelaide and ME are raising home loan rates as they respond to higher funding costs.
Of course, these increases apply to the existing loan book and hit borrowers who are already “on the hook’’ with a mortgage.
While the ANZ low rate is aimed squarely at new “safe” customers with considerable deposits and means – just the sort of customers the Royal Commission and APRA has suggested they lend to.
So what we could see in the near future is the bizarre scenario of the big four banks using lower interest rates as a lure to catch the “safe” borrowers at the same time as the banking system in general puts the squeeze on existing borrowers and particularly those coming off the rash of interest only lending from 2014 onwards that matures all the way through to 2022.
Delinquency rates higher for those moving off interest only loans
Already there are some early indications that those making the switch from interest-only loans to principal and interest are struggling to keep up with the extra repayments which are around 30 per cent higher.
Moody’s Investor Services said the 90 days past-due delinquency rate for securitised mortgages that have converted to principal and interest from interest-only was at 0.94 per cent in November 2017, double that of interest-only loans that have not yet converted and around 0.24 percentage points higher than the overall delinquency rate for securitised mortgages.
Moody’s expects the number of bad loans in this category to increase over time, particularly if house prices continue to fall as they have been over the past year.
RBA sits steady, while home loan rates vary widely
All of this interest rate turmoil on home loan rates comes as the Reserve Bank of Australia sits on its record low official cash rate of 1.5 per cent which has been in place since August, 2016 – a rate that is unlikely to change at the August meeting to be on Tuesday.
According to RateCity research, during those two years without a move from the Reserve Bank, owner-occupiers not on interest-only loans have seen an average fall of 14 basis points to their mortgage rates to 4.5 per cent, while investors paying interest-only loans have seen their rates rise by 35 basis points to 5.05 per cent.
With APRA trying to stabilise the banks loan books by capping investor growth and interest only lending, banks have been rewarding borrowers living in their homes and paying down their debt with cheaper home loans.
At the same time investors and even owner-occupier customers buying their own home using interest-only loans have been putting up with sizeable hikes.
All of which shows that the apartheid system in loans is getting much worse and is likely to continue to get worse as the banks lure safe, new customers with honey and apply the birch to those who don’t meet their newly found stricter loan standards.