Regulators have intensified their crackdown on lending standards in the home mortgage market after launching several investigations into the lending practices of banks and other lenders.
However, banks have escaped having to set aside more cash to cover for the higher risks stemming from the booming growth of investor loans and interest-only mortgages.
In a letter sent to banks this week, the Australian Prudential Regulation Authority (APRA) has warned the industry of “emerging risks” in the home loan market, including the boom in investment borrowing.
APRA chairman Wayne Byres states in the letter that growth in investment home loans of above 10 per cent would likely trigger risk reviews of banks’ loan activities.
“Given the currently very strong growth in investor lending, supervisors will be particularly alert to plans for growth in this part of the portfolio,” APRA stated in the letter.
Banks are warned that investor loan growth materially above 10 per cent “will likely result in a supervisory response”.
ASIC targets interest-only loans
The APRA action is part of a broader review of home lending practices by regulators, with the Australian Securities and Investments Commission (ASIC) also launching a probe into rapid growth of interest-only lending by banks.
“While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt,” he said.
“If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action.”
ASIC’s investigation appears to be focused on the sales practices of lenders only, with mortgage brokers spared heightened scrutiny.
Mortgage brokers have been marketing interest-only mortgages aggressively to new home borrowers, even though they are more costly to service than standard loan products.
Brokers now account for around half of all home loans sold in Australia.
Interest-only loans are the fastest growing credit product in the residential property market, accounting for more than 40 per cent of new housing loan approvals.
Under responsible lending laws, banks need to ensure that borrowers can meet their repayment obligations without substantial hardship.