Why the Banking Royal Commission Affects Our Home Loan Repayments

Turn the news on any day this week and you will hear a story of a bank apparently treating a borrower outrageously. Believe it or not, such stories have an impact on what you and I pay towards our home loan every month.

The banks have been on the nose for yonks for apparently approving loans for people who cannot afford them – and this is impacting our home loan repayments.

Long before the Royal Commission, the Australian Prudential Regulation Authority (APRA) was turning its sights on to the banks’ lending practices and this is having a huge impact on what we could borrow and at what rate.

First APRA limited the banks’ growth in investor loans to 10 per cent a year. As the banks slammed the brakes on investment lending, the interest rates on investment loans could be 0.5 per cent higher than owner occupied loans.

Then APRA told lenders to keep interest-only loans at 30 per cent of their loan portfolio. But the banks have got really tough on those of us looking to borrow interest-only. In fact, they are so tough that they have gone way further than APRA suggest; now only around 15 per cent of home loans are interest only – see Pete Wargent’s graph below.

 

APRA is now happy that the banks are not so over-exposed to investor lending that it has intimated that the 10 per cent growth hurdle may no longer be necessary so much so that the banks are offering pretty low investor loans.  One bank has a 3.99 per cent variable investor loan.

But the banks are still pursuing principal and interest owner occupied loans aggressively; there are now a couple of lenders offering 3.59 per cent.

What’s this got to do with the news and the Royal Commission?  The Royal Commission is essentially a rear-view mirror, showing what the banks did a few years ago.

But, in light of lax-lending examples we are hearing about in the news, and due to APRA’s pressure, the banks are behaving very differently towards would-be borrowers.

The banks have radically changed their lending policies

Stable employment?  Good savings history?  Looking to buy a family home in a metropolitan location, the banks will give you a really good deal.

Over 60? Casual employment? Looking for an interest-only investment loan in a mining town?  Don’t fancy your chances.