APRA Data highlights rising prominence of interest-only and high LVR lending

APRA today released data on Australian ADIs (Authorised Deposit-taking Institution) exposure to property earlier today.  The data showed that at the end of the March 2014 quarter, there was $1.2 trillion worth of residential loans to households across Australia, up from $1.17 trillion at the end of 2013.

Chart 1

Focusing on the total value of lending, 35.4% of the outstanding loans to domestic ADIs have an offset facility and 35.4% are interest only mortgages.  The proportions of each are at a record high level currently.  On the other hand, only 3.1% of mortgages are low-documentation loans which is at a historic low proportion. Just 0.1% are other non-standard loans.

Chart 2

Looking at the number of loans, 29.6% of all loans have an offset facility and 78.0% have a re-draw facility.  In terms of the number of loans, 28.0% are interest-only mortgages and 3.5% are low-documentation loans.  The proportion of loans with an offset facility and the proportion of interest-only mortgages are at a record high while the proportion of low-documentation loans is at a record low.

Chart 3

The average outstanding balance for residential loans was recorded at $235,000 at the end of March 2014, up from $233,500 at the end of 2013.  Loans with an offset facility ($281,400) and interest-only mortgages ($297,200) have a much higher average balance than the average across all loans.

Chart 4

Over the first quarter of 2014, there was $73.815 billion in new residential mortgages, down from $84.160 billion over the final quarter of 2013.  Of these new loans, 64.3% were to owner occupiers and 35.7% were to investors.

Chart 5

As I mentioned previously, the proportion of interest-only loans which were outstanding to banks was recorded at 35.4% (based on value) however, interest-only lending was much higher over the quarter with 39.4% of new loans interest-only loans.  It is clear that low-documentation loans are becoming harder to receive.  Over the March 2008 quarter, 11.5% of loans were low-documentation, over the most recent quarter just 0.6% of new loans were low-documentation.  Over the quarter, 3.1% of loans were approved outside of serviceability which was steady over the quarter.  The proportion of loans approved outside of serviceability has been higher than it is currently but was consistently lower than 3% of all loans before the June 2012 quarter.

Chart 6

The level of higher LVR lending also increased over the first quarter of this year with 34.8% of new loans having an LVR of 80% or more, up from 34.2% over the previous quarter.  The proportion of new loans with an LVR of more than 80% is at its highest level since the December 2011 quarter (34.9%).  Although higher LVR lending is increasing, the proportion of loans written with an LVR of 90% or more was recorded at 13.5%, down from 13.6% the previous quarter.  This indicates that there is growth in the 80% to 90% LVR segment, which accounted for 21.3% of new mortgages over the quarter, up from 20.7% the previous quarter.  The proportion of new loans with an LVR of between 60% and 80% accounted for the largest proportion of new loans at 41.2% and sitting at its highest proportion since September 2011 (41.5%).

Chart 7

By combining the latest data from APRA with recently released data from the ABS, you get some really valuable additional insights into the exposure of Australian ADIs to residential property.

The ABS estimates that there were 9.334 million residential dwellings in Australia at the end of March 2014 and the latest APRA data highlights that there was 4,999,800 outstanding mortgages at the end of March 2014.  This indicates that only 53.6% of all dwellings nationally have a mortgage.  Of course as you can see from the chart which follows the proportion of mortgages properties is rising.

Chart 8

The ABS estimates that the total value of residential dwellings across Australia was $5.1 trillion at the end of March 2014.  Pairing that with the value of outstanding mortgages reported by APRA at the same time ($1.2 trillion) it indicates that only 23.4% of the value of Australian housing is mortgaged to Australian ADIs.  This analysis highlights that for better or worse, Australian’s store significant wealth within their residential properties.

Chart 9

Overall the data indicates that the proportion of interest-only lending and loans with an off-set facility is increasing.  No doubt APRA will have a close eye on this phenomenon, particularly interest-only lending which is inherently more risky than when both the principal and interest is repaid.

The majority of new mortgages are written on an LVR of less than 80% however, the rising proportion being written between 80% and 90% will no doubt be closely scrutinised.  It is encouraging to see that there are fewer new mortgages being written with an LVR above 90%. Although the current value of housing compared to that mortgaged is relatively low, a sharp down-turn in property values would have a significant impact on more recent purchasers.  The first five years of a mortgage is inherently the riskiest.  Whilst those who have owned their home and have significant equity within it can weather a down-turn, recent buyers with little or no equity, and those who have leveraged their equity for other investments are significantly more exposed in the event of a downturn.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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2 Responses to APRA Data highlights rising prominence of interest-only and high LVR lending

  1. Mat Carpenter May 30, 2014 at 3:39 pm #

    I’ve read about APRA becoming concerned re more lending over 80% LVR, and pointing the finger at “relaxed lending criteria” etc. As a broker, I haven’t seen a relaxing of lending criteria, especially by the mortgage insurers. What I HAVE seen is buyers wanting to buy the property NOW (and being prepared to cop the LMI), rather than waiting until they’ve saved a larger deposit (by which time they fear the property will have increased in value). In a stagnant or modest market, they had time to wait and save, but in this hot property market, paying LMI appears to be a reasonable option in their minds. That’s why there are more LMI deals recently, not because of relaxed or risky lending practices.
    For interest-only loans, I’d suspect the increase in their share of the market would tie in closely with the increase in lending for investment. Again, nothing to do with “risky” lending practices.

  2. Jim September 16, 2014 at 12:58 pm #

    the previous comment was quite contradictory. The very fact people are taking on more high loan to value loans is in itself an indication that lending and borrowing is becoming more risky.

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