Lending to borrowers with a low net income surplus will be targeted, signals chairman Wayne Byres
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Lending to borrowers with a low net income surplus will be targeted, signals chairman Wayne Byres
Borrowers whose income barely exceeds their repayments will be APRA’s next target, chairman Wayne Byres announced yesterday.
The prudential regulator is focusing on the ‘net income surplus’ (NIS) of borrowers; i.e. how much income borrowers have left over after living expenses and debt repayments.
With interest rates presently at record lows and unemployment also low, APRA is concerned that any increase in either could threaten financial stability. As chairman Wayne Byres put it, “low NIS borrowers are obviously vulnerable to shocks.”
Almost 20% of lending goes to borrowers with less than $200 in surplus per month, a figure which has moderated but not fallen in recent years, despite APRA pressure, Byres warned.
“High LTI lending in Australia is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates, such as the UK and Ireland.”
Byres attacks the HEM
Byres claims that NIS may be even lower than recorded, due to misuse of living expense benchmarks: “put simply, if living expenses are underestimated then measures of NIS are overstated”.
Lenders who used the Household Expenditure Measure (HEM) to estimate living expenses were at risk, due to it being a ‘modest’ estimate, according to Byres. “It is open to question whether – even if it is higher than a borrower’s own estimate – such a benchmark always provides a realistic assessment of a borrower’s genuine expenditure needs.”
“From APRA’s perspective, we would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers and give greater thought to the appropriate use and construct of benchmarks in instances where those estimates are deemed insufficient.”
Could the reality be even worse then APRA suggests?
APRA have looked at living expenses and living repayments for a number of years, directing banks to reduce high LVR interest-only borrowing in April this year.
However, the numbers suggest they APRA is struggling to control borrower indebtedness. Household debt to income has risen steadily since 2012 as have, more recently, the proportion of non-performing loans. According to Byres, “the overall rate of non-performing housing loans is drifting up towards post-crisis highs, without any sign of crisis.”
Furthermore, APRA’s national figures may understate how stretched borrowers are in Australia’s most expensive cities. For example, APRA records show that just 10% of lending had a loan to income ration of six times or more. This, Byres warned, equated to 50% of a borrower’s net income spent on repayments, should interest rates rise to 7%.
Ye today, with the cash rate at just 1.5%, borrowers in Sydney already spend nearly 50% of their gross annual household income on repayments for a discounted variable rate mortgage, according to CoreLogic (the exact figure is 48.4%). The figure nationally is 37.2%.
Borrowers whose income barely exceeds their repayments will be APRA’s next target, chairman Wayne Byres announced yesterday.
The prudential regulator is focusing on the ‘net income surplus’ (NIS) of borrowers; i.e. how much income borrowers have left over after living expenses and debt repayments.
With interest rates presently at record lows and unemployment also low, APRA is concerned that any increase in either could threaten financial stability. As chairman Wayne Byres put it, “low NIS borrowers are obviously vulnerable to shocks.”
Almost 20% of lending goes to borrowers with less than $200 in surplus per month, a figure which has moderated but not fallen in recent years, despite APRA pressure, Byres warned.
“High LTI lending in Australia is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates, such as the UK and Ireland.”
Byres attacks the HEM
Byres claims that NIS may be even lower than recorded, due to misuse of living expense benchmarks: “put simply, if living expenses are underestimated then measures of NIS are overstated”.
Lenders who used the Household Expenditure Measure (HEM) to estimate living expenses were at risk, due to it being a ‘modest’ estimate, according to Byres. “It is open to question whether – even if it is higher than a borrower’s own estimate – such a benchmark always provides a realistic assessment of a borrower’s genuine expenditure needs.”
“From APRA’s perspective, we would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers and give greater thought to the appropriate use and construct of benchmarks in instances where those estimates are deemed insufficient.”
Could the reality be even worse then APRA suggests?
APRA have looked at living expenses and living repayments for a number of years, directing banks to reduce high LVR interest-only borrowing in April this year.
However, the numbers suggest they APRA is struggling to control borrower indebtedness. Household debt to income has risen steadily since 2012 as have, more recently, the proportion of non-performing loans. According to Byres, “the overall rate of non-performing housing loans is drifting up towards post-crisis highs, without any sign of crisis.”
Furthermore, APRA’s national figures may understate how stretched borrowers are in Australia’s most expensive cities. For example, APRA records show that just 10% of lending had a loan to income ration of six times or more. This, Byres warned, equated to 50% of a borrower’s net income spent on repayments, should interest rates rise to 7%.
Ye today, with the cash rate at just 1.5%, borrowers in Sydney already spend nearly 50% of their gross annual household income on repayments for a discounted variable rate mortgage, according to CoreLogic (the exact figure is 48.4%). The figure nationally is 37.2%.
