“Big shock ahead”: savvy fixed-rate refinancers

A ‘large cohort’ of fixed-rate borrowers whose loan terms come due next year will face a significant ‘repayment shock’ that ‘comes all at once’, the Australian Security Authority has warned. prudential regulation (APRA).

Ahead of the first public hearings of the House of Representatives Standing Committee on the Economy (October 11), APRA was asked if it had noticed any noticeable trends in defaults given the current rising environment. rates.

Outgoing APRA President Wayne Byres gave early hope when he answered “no”, but was quick to clarify the context that many Australian mortgage holders may soon face.

“The short answer is no…”

“Well, I’m giving you a quick answer, but the type of late payment customer rate keeps going down – which no one thinks, I think will continue for much longer,” he explained.

“And when we… talk to the banks, they certainly think there will be a reversal, but right now the arrears rates are actually still going down.

“So it’s obviously nice, but probably not a situation that’s going to last too long,” he added.

APRA Vice President John Lonsdale presented some insightful statistics to outline the current and projected lending situation.

“So the latest stats…from June, and we have non-performing loans at around 8%, so that’s historically very low, and as Wayne said, it’s been down over the last 12 months,” M said Lonsdale.

“It’s the same for housing, but for small businesses [it’s] slightly higher.

“If there’s a pressure point, that’s probably where it starts to show up. These are aggregates that we watch very closely, as do the banks—not just non-performing loans, but actually the excesses that have been accumulated, and anecdotally what we find is that some of these surpluses, while they are still there, they are pulled down a little more.

“So we expect there to be some uplift as we go, but to be from a very low base.”

Borrowers who compress the budget to repay their loans

Asked by committee chairman, Labor MP Dr Daniel Mulino, about the likelihood of them being ‘pockets of stress’ and APRA’s expectation that pockets of stress will likely coincide with pockets of rising unemployment , Mr. Byres replied:

“Yes, obviously unemployment [is] a very important driver because people…the story of the Australian mortgage holders…is that as long as they have a job, they will continue to pay, even if they have to reduce their budget somewhat.

“But there comes a time when you have no more income, you just can’t pay anymore, so unemployment is a key issue.

“When I think of the pockets, however, I think there will be people who had very low service capacity, even at low fares; people who borrowed at very high interest, high debt-to-income ratios; and there will be people who took advantage of the very low fixed rates that were offered in 2020, in the midst of a pandemic.

“A lot of them will be sort of two- or three-year fixed rate loans, which will need to be refinanced over the next 12 months.

“And for those people, there will be a significant repayment shock as they will have to refinance their fixed rates to higher rates, and the gradual increase in interest rates that variable rate borrowers have experienced will hit hard. fixed rate borrowers.

“So those are the kinds of loan types that I think will be particularly vulnerable.

“But across the borrowing cohort as a whole, if there are areas of the country or communities or industries where there’s a pick-up in unemployment, then obviously that’s going to be a vulnerability as well,” Ms. Byres.

Identify those most affected by the “rate shock”

Asked further if there was a specific geographic area of ​​people exiting fixed interest rate loans that would be most affected, My Byres replied:

“I don’t think we have the data that [could] give it by geography, but there’s no doubt that over the past couple of years the share of mortgage borrowers – just the general share – within the broader fixed rate community has grown significantly.

“It has served its purpose at present because these borrowers have been protected, but…it will end at some point…”

Mr Lonsdale commented: “In aggregate terms, what we are seeing is that 23% of new home loans in 2020 have been fixed, so that is quite a change from what has traditionally been the case. We also look at when these loans actually mature.

Before the pandemic, Mr Lonsdale explained that traditionally the mortgage market was “dominated by variable rate loans”.

” So there is [some] much higher rate, as Wayne said, of people taking fixed rate loans at very low rates in 2020. And so we have a good idea of ​​when that deadline is global and towards the middle of the next year, as I recall, that’s probably the peak of people getting out of fixed rate loans.

“If you can imagine them refinancing it to [a] a significantly higher interest rate, variable or fixed, which has the importance of being a fairly significant shock for these people.

He specifies: “It’s 23% fixed rates over a period of two years.

“So if you go back to pre-pandemic, over 80% of home lending was variable and that dropped to about, just look at the chart, maybe half, 50%, around July 21 – and that’s is now at about 80% cent. So it was higher, then it went down, then it went back down.

Mark the occasion with others

APRA appeared before the House of Representatives Standing Economics Committee alongside the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission, after the Reserve Bank of Australia three weeks earlier.

As the prudential supervisor of the financial services industry, APRA currently oversees approximately 2,000 institutions among licensed deposit taking institutions (banks, credit unions and building societies), general insurers, life insurers, private health, friendly societies and most trustees in the pension sector.

In total, these institutions hold approximately $8 trillion in assets for Australian depositors, policyholders and pension fund members. This amount has increased by about a third compared to just five years ago, showing that despite the financial and economic ups and downs of recent years, the financial system has continued to grow strongly.

The purpose of the hearing was to officially discuss APRA’s annual report for the year 2020-2021.

[Related: Banks report lending growth amid rate hikes]

“Big shock ahead”: savvy fixed-rate refinancers

mortgage

Last update: October 12, 2022

Posted: October 12, 2022

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