Interest-only loans peak at 46% of new mortgages
“It scares the hell out of me – the size of the debt people are taking on without principal repayments,” said Don Argus, a former chief executive of National Australia Bank, last week.
“Banks giving million-dollar home loans to young people had lost perspective. It used to be very difficult to get a home loan in the old regulated banking environment,” he says. “Now it’s like a commodity.”
According to data compiled by the Australian Prudential Regulation Authority, interest-only mortgage loan approvals peaked at a record 46 per cent of total mortgage loan approvals in the June quarter of last year. Since then, their proportion of total mortgage approvals has reduced to 37 per cent, still much higher than the level of five years earlier.
Interest-only loans have been particularly popular among those buying homes for “investment” purposes. Such loans can allow high-income earners to maximise the benefits of negative gearing, but can be disastrous when house prices fall.
Argus’ views on interest-only loans are taken seriously in banking circles because he built his career around being rigorous on lending standards in the late 1980s and early ’90s, avoiding the disastrous commercial loan exposures that hobbled his peers.
He says Australian consumers are among the most indebted in the developed world and the governments that have been embracing interest-only loans will leave a terrible legacy for future generations.
Argus says a correction in house prices is inevitable, starting with the apartment market. But he is not predicting a severe credit cycle as last seen in the early ’90s when corporate losses and inflated asset values brought several Australian banks to their knees.
“It may not be as severe because bankers these days do understand that free cash flow is important when assessing the risk profile of corporates,” he says. “But it remains to be seen how their risk-assessment processes stand up when interest rates begin to rise again for small business and consumer customers.”