The Australian Prudential Regulatory Authority (ARPA) has accused National Australia Bank (NAB) of trying to get around stricter lending restrictions for riskier home loan borrowers. That comes after NAB’s lending to borrowers growing to AU$63.5 billion, which is up by 13% in the past year alone.
In December APRA released a new set of guidelines for lenders, advising banks to assess borrowers on a 7% mortgage rate. Mortgage rates currently hover around 5% at select banks. But the guidelines requested that lending institutions use a minimum 7% rate in case rates reached those levels. This is done to prevent borrowers defaulting on loans in the future in the case of higher repayments.
The Australian Financial Review claims to have obtained evidence that NAB often applies the current mortgage rate — which can be as low as 4.29% — to gauge whether home loan borrowers can afford to pay for their mortgage. And they use this low rate to figure out how much to lend to borrowers. APRA rightly points out that many of these loans could become risks if rates were to rise, leading to concerns over a housing crash.
APRA’s guidelines target Sydney’s property growth
With Sydney house prices growing by 14% over the past year, ARPA’s guidelines were seen as a way of preventing a potential housing bubble from getting out of control.
The Reserve Bank of Australia (RBA) was also hoping these guidelines would put pressure on rising house prices in both Sydney and Melbourne. The RBA want lower interest rates to go towards improving the economy, rather than stoking housing growth in these cities. Instead Sydney’s property market growth is leading to a war between banks to issue as many loans as possible, which is pushing down lending requirements.
NAB has denied that they’re bending the rules, even though a source from the bank admitted that there could be some irregularities between their calculators and APRA’s recommendations.
Currently, if you took out a home loan at APRA’s minimum recommended 7% interest rate, NAB may overlook any other liabilities you have in order to qualify you for a home loan. This means that NAB’s lending practice appears to be targeting people who already have existing assets, but who wish to invest in new properties.
ARPA could increase restrictions on capital in a bid to punish banks
ARPA has issued a warning to any banks found to be flouting their recommendations. They’re saying that they may increase the level of capital that banks and building societies need to hold before approving new borrowers. That will make it harder for them to issue new home loans.
Evidence from smaller banks — showing a rush of customers towards bigger banks with more lending capacity — suggests that many leading banks are actively using this relaxed approach to lending. Banks that could come under such lending limits not only include NAB, but also Macquarie, Westpac and the Commonwealth Bank, all of which have seen home loan lending increase in the past year.
That’s unlikely to deter lenders or borrowers from continuing to ride the wave of booming house prices in Sydney and Melbourne. The Daily Reckoning’s property expert, Phil Anderson, has written a report that will show you why we’re only just entering into a golden period of property price growth. To find out how you can read ‘Why Australian Property Is on the Verge of a Decade Long Boom’, click here.
Contributor, The Daily Reckoning