Mortgage Lendng

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<div>EXPERT OBSERVATION</div>
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<div>The regulatory throttling of mortgage lending maintained its firm stranglehold in the first quarter of 2018, with interest-only lending remaining at just 15.7 per cent of new residential term loans by value (a far cry from 45.6 per cent at the September 2015 peak). </div>
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<div>Both the stock and flow of interest-only loans has been significantly reduced by the introduced macroprudential measures. </div>
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<div>Tighter loan-to-value (LVR) ratios also continued to be applied in Q1, with just 6.8 per cent of new residential lending at LVRs of 90 per cent or greater in the March 2018 quarter. </div>
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<div>Loans approved outside serviceability were well down from the December 2017 quarter spike, but remained at an elevated level implying that tighter standards almost certainly continued to bite throughout the first half of 2018. </div>
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<div><em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em></div>
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Interest-only loans stay low: Pete Wargent

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<div>EXPERT OBSERVATION</div>
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<div>The average mortgage size in Queensland in the final quarter of 2018 took a leap from $424,000 to above $450,000, according to AFG's latest mortgage index.</div>
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<div>Evidently more southern state types are taking their borrowing capacity north to the Sunshine State. </div>
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<div>Overall lending volumes through AFG brokers were way down on a year earlier at a shade over $13 billion for the quarter.<br><br>The prior year comparative figure was $14.8 billion, some 12 per cent higher.</div>
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<div>Major lenders continue to leak market share at under 58 per cent of lodgement volumes, down from 78 per cent in 2013. </div>
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<div>With the share of investors in the market well down - and the share of interest-only lending also at the lowest level across the data series - a natural consequence of this is borrowers redirecting their borrowing capacity at larger home loans. </div>
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<div>Thanks to Queensland borrowers the average loan size nationally hit a fresh high level in the fourth quarter of 2018 at $509,162, up from $499,193 a year earlier.<br><br><span>The <a href="http://petewargent.blogspot.com/2019/01/loan-sizes-down-in-victoria-wa" target="_blank">ABS has noted</a> it has discontinued its figures on implied average loan sizes due to loan-splitting potentially understating the results. </span><br><span><br></span><span>According to Reserve Bank of Australia (RBA) research only around 1 in 10 borrowers use their maximum borrowing capacity or something close to it, helping to explain how the average loan size can now be at a record high. </span>
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<span><br></span><span>In the RBA's own words "tighter lending standards do not constrain most borrowers, but do affect some".</span>
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<div><span><em><strong>PETE WARGENT</strong> is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em></span></div>
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Average mortgage size leaps in Queensland: Pete Wargent

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<p>The first glimpses of recovery are emerging in the Australian mortgage market, with an increase in lodgements seen for the first time in a year, according to the latest AFG Index.</p>
<p>Notably their findings showed that, non-major lenders are driving much of the activity, responsible for a record high 42 per cent of lodgements and for the first time accounting for more than one in every three mortgages for first home buyers.</p>
<p>The AFG Index recorded more than $13 billion in lodgements in the three months to June 30, representing a 12 per cent increase on the last quarter. Despite the turnaround in the last quarter, the numbers remain 11 per cent down on the same time last year.</p>
<p>AFG Chief Executive Officer David Bailey said, “there are tentative signs of increased activity with both lodgement numbers and volumes up significantly for the quarter. It will be important to see the impact of recent moves by the RBA but we remain cautiously optimistic."</p>
<p>“It remains relatively subdued out there in Victoria and New South Wales, with both states recording an 11 per cent dip on the same time last year, offset by activity in the smaller states,” he noted.</p>
<p>South Australia was ostensibly flat, whilst Queensland and Western Australia recorded slips of thirteen per cent and seven per cent respectively.</p>
<p>Average mortgage size is at an all-time high of almost $515,000, with South Australia the only state to record a drop to now be sitting at $402,473.</p>
<p>Mr Bailey said “with investor lending up, it is interesting to also note the major banks’ responses to the recent cash rate reductions where investor loan rates have seen larger rate cuts passed on to customers. With those APRA-related restrictions now lifted, this could signal a new battleground for customers.</p>
<p>“After a period of slow growth, Refinancers have lifted to 28 per cent, but this is still a long way from the activity seen in 2016 when they recorded levels as high as 39 per cent. Homeowners looking to Upgrade have dropped back to the same level they were at in the final quarter of 2017,” he said.</p>
<p>AFG found, among the non-majors, Macquarie’s market share grew steadily across the quarter and finished June just shy of 10 per cent. ING has also been regaining ground and finished the quarter at four per cent, after dropping to less than two per cent in March.</p>
<p>While among the majors, CBA increased market share to finish June at 18 per cent and NAB finished a tough quarter to reach seven per cent by the end of June. NAB’s gains appear to be at the expense of the Westpac group of brands with Westpac, Bank SA, Bank of Melbourne and St George all recording a fall in market share.</p>
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Signs of home loan market recovery, non-major market share at record high: AFG

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<p>Data for lending to households and businesses data for December 2018 was released earlier this week.</p>
<p>This data series replaces the old housing finance and lending finance series and includes some different data. Specifically focusing on lending to households the data shows that the weakening of demand for mortgages has continued.</p>
<p><img class="align-center" src="https://www.corelogic.com.au/sites/default/files/inline-images/pic1.png" alt="pic1.png" width="842" height="355" data-entity-type="file" data-entity-uuid="bb33c8c9-5ed9-47d3-a589-bf7f9843bf66" data-image-style="" data-responsive-image-style="wide" data-zoom-image-style="_as_uploaded" data-mfp-src="https://www.corelogic.com.au/sites/default/files/inline-images/pic1.png"></p>
<p><br>As the above chart shows, investor mortgage lending has been weakening for some time however, over recent months there has been a rapid slowdown in lending to owner-occupiers. Over the month, there was a total of $26.0 billion in mortgage finance to borrowers which was the lowest monthly value since January 2014. The value of mortgage lending has fallen -5.2% over the month and is -15.2% year-on-year. Looking at the split between owner-occupier and investor mortgage lending, there was $18.5 billion worth of finance commitments to owner occupiers which was -5.3% lower than the previous month and its lowest value since May 2015. The remaining $7.5 billion worth of finance to investors was -4.8% lower over the month and the lowest monthly value since April 2013. While the slowdown in mortgage demand began, and is well entrenched, across the investor segment, owner-occupier mortgage demand is now also falling rapidly.</p>
<p><img class="align-center" src="https://www.corelogic.com.au/sites/default/files/inline-images/pic2.png" alt="pic2.png" width="802" height="338" data-entity-type="file" data-entity-uuid="b08c7e3c-d4d4-48b8-9ecd-078d9723d53f" data-image-style="" data-responsive-image-style="wide" data-zoom-image-style="_as_uploaded" data-mfp-src="https://www.corelogic.com.au/sites/default/files/inline-images/pic2.png"></p>
<p><br>Looking a little more granularly at the data, over the month there was $12.5 billion worth of owner-occupier finance commitments excluding refinance, $6.0 billion worth of owner occupier refinance commitments, $4.9 billion worth of non-refinance commitments to investors and $2.6 billion worth of investor refinances. The chart highlights a weakening of demand across each of these four categories however, refinance demand is generally holding up better than non-refinance. New lending to owner-occupiers is the lowest it has been since May 2015, owner occupier refinances are the lowest they’ve been since August 2017, investor new lending is at its lowest value since January 2012 and investor refinance lending is the lowest it has been since August 2018. </p>
<p>The data clearly shows that housing finance commitments are falling the bigger question is what is the actual driver of the falls. According to recent commentary from the Reserve Bank in their Statement on Monetary Policy, demand is falling because of ‘significantly fewer loan applications over the past year or more.’ Personally, I am not necessarily convinced this is the only reason.</p>
<p>The volumes that eventually make their way to lending teams are likely to be significantly lower but is this actually occurring because of fewer people wanting a mortgage or fewer making it that far? I suspect that demand has certainly fallen but possibly it has fallen a greater amount because people are talking to the bank lender or mortgage broker and the feedback they are given is that there is no point applying because with current credit conditions this just isn’t going to get approved.</p>
<p>Looking at it another way, credit conditions remain tighter than they have been in many years. Although the 10% cap on investment credit growth and 30% interest-only origination limit have been removed (largely because they became redundant), both investor and interest-only borrowers continue to be charged a premium compared to owner-occupier mortgages. Furthermore, lenders are now asking a lot more questions about household expenditure than they have in the past rather than relying on an index of household expenditure. Although this may be a new normal, in the past, potential borrowers perhaps haven’t had to be so mindful of their expenditure prior to a mortgage application and there will be a period of adjustment to these new conditions.</p>
<p>In the past borrowers have tended to adjust their expenditure appropriately once they have taken on the mortgage rather than now when the adjustment has to be made prior to obtaining approval for the mortgage. Finally, when applying for a mortgage, borrowers are being assessed on their ability to repay a mortgage at an interest rate above 7% while most lenders will offer a new borrower a discounted variable at around or below 4%. The current cash rate futures yield curve is now suggesting a reduction in official interest rates is more likely than a hike. In my mind, 7% mortgage rates are a long way off and we won’t be getting back to those levels absent some decent household income growth.</p>
<p>While in isolation these individual changes to credit policy changes may not remove many potential borrowers, the combination of these changes likely result in far fewer borrowers being considered credit-worthy for a mortgage. Therefore, while application volumes are likely lower, the blame can’t solely be pointed at fewer applications when the process for applying for a mortgage has changed so dramatically over recent years.</p>
<p><em><strong>CAMERON KUSHER</strong> is a Research Analyst at CoreLogic.</em></p>
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Is it tighter credit or fewer applications hitting mortgage demand? CoreLogic's Cameron Kusher

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<p>Westpac Group, the nation's second largest mortgage lender, has told mortgage brokers to grill clients on why they want an interest-only loan.</p>
<p>They are to "make them aware of their features and considerations".</p>
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<div>Brokers must note the client's answers and include them in the application.</div>
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<p>"It is important clients can provide clear reasoning for their choice of loan and can demonstrate an understanding of an interest-only loan and its features so we can have confidence our product aligns to their needs," a bank spokesman told Fairfax Media.</p>
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Westpac tells mortgage brokers to quiz investors on IO rationale

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<p>AMP is reducing its mortgage lending to most non-resident borrowers.</p>
<p>AMP is blaming the tough policy on "changes to the market" without specifying their nature or extent.</p>
<p>"Our standards are continually reviewed with market developments to ensure we remain a prudent and responsible lender. Our criteria for overseas borrowers has recently been reviewed in line with this objective," AMP said in a statement obtained by the<em> Australian Financial Review</em>.</p>
<p>It follows complaints among other major lenders about fraudulent applications and fears of money laundering.</p>
<p>Major banks are believed to have only between 2 and 4 percent of their portfolios with overseas investors.</p>
<p>Under AMP's policy, revealed in confidential documents being circulated to major third party distributors, foreign currencies are split into Tier 1 and Tier 2 categories.</p>
<p>Under the new arrangements, 80 percent of income and expenses derived from a Tier 1 category is acceptable and 50 percent from a tier 2 when assessing a loan application.</p>
<p>Tier 1 category are Canadian dollars, Euros, British sterling, Hong Kong dollars, Japanese yen, New Zealand dollars, Singapore dollars and US dollars.  </p>
<p>Tier 2 is the Chinese yuan. Borrowers seeking a loan with Chinese yuan must also provide a 50 percent deposit. For borrowers with Tier 1 currencies the maximum deposit is 30 percent.</p>
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