The RBA's assistant governor talks about the expiry of IO loans and the bank's next move on interest rates
About two-thirds of interest-only loans are due to expire by 2020, suggesting that about $120bn of IO loans are scheduled to roll-over to P&I loans each year over the next three.
As a result, the ‘representative’ interest-only borrower will face a $7,000 increase per year in scheduled repayments, according to RBA statistics presented by assistant governor Christopher Kent at a Housing Industry Association breakfast on Tuesday.
A representative interest-only borrower is defined as someone who has a $400,000 30-year mortgage with a five year interest-only period.
However, Kent said the cash flow effect of this is estimated to be less than 0.2% on average per annum over the next three years.
“[While] the aggregate effect of the transition ahead on household cash flows and consumption is likely to be small, some borrowers may experience genuine difficulties when their interest-only periods expire,” Kent said.
But he added that the borrowers who have not built up enough savings or are unable to pay their loans are in the minority.
For the household sector as a whole, the cash flow effect of the transition is likely to be moderate, he said.
While the transition away from IO loans has been relatively smooth, and is projected to continue that way, that doesn’t mean APRA’s benchmarks weren’t warranted in the first place, he said.
When the first 10% benchmark on investor loan growth was introduced in 2014, it was as a result of APRA and ASIC looking more closely at banks’ lending standards. Those measures were required to ensure borrowers were better positioned to service their loans in the future.
“They [the regulators] thought there were possible improvements the banks could make, and APRA indeed went through and acted to ensure that they were lifting their lending standards and I think that’s had a noticeable effect,” Kent said.
