Credit environment is creating a ‘new normal’: AFG

According to the report, the loans lodged by AFG brokers were showing a new trend in FY18: a growing proportion of people are taking out loans to “upgrade” to more expensive/larger housing, fewer people are taking out loans to invest in property or refinance and a record number are choosing principal and interest loans (P&I).

Specifically, the report shows that over the 2018 financial year, nearly 43 per cent of all mortgages lodged through AFG brokers in Australia were for those upgrading while just over 28 per cent were for those looking to invest.

This marks a step-change in the usual trends for loans lodged through the aggregator, being a record high for the upgraders and a record low for investors.

Indeed, it marks the first time in five years that the proportion of investor loans written in a financial year has dropped below 30 per cent.

Notably, the vast majority of loans (nearly 81 per cent) lodged in the last financial year were principal and interest loans — the highest annual proportion for five years and almost double the number in FY15.

Other trends include first home buyers holding steady for the past four quarters at 13 per cent, while interest-only loans comprised around a fifth of all loans each quarter.

Refinance loans came in around 23 per cent of all lodgements in the financial year 2018.

Total mortgage lodgement numbers for the last quarter were up by nearly a thousand on the prior quarter, finishing the 2018 financial year at 28,896.

Lodgement volume for the quarter also increased on the previous quarter, closing the final quarter at $14.6 million.

“Established pattern” forming

Speaking of the composition of loans, AFG chief executive David Bailey said that regulatory intervention in 2017 and tightened lending criteria appear to have established a structural change that may be the “new normal” for the market.

He noted that investors are “sitting steady” and that first home buyers have held a firm 13 per cent of the share for the past four consecutive quarters, while refinancers and upgraders were “forming an established pattern”.

Touching on the high proportion of P&I loans, Mr Bailey said that mortgage holders were taking advantage of low interest rates to pay down the principal.

Speaking to The Adviser, Mr Bailey said: “The regulator has driven a lot of requirement for lenders, particularly ADIs [authorised deposit-taking institutions], to look at their investor book. The majority of investor loans are interest-only, so that capping of investor loans and interest-only loans for a period drove lender behaviour, which ultimately drove differential pricing for those types of products.

“Our understanding, from speaking to our brokers, is that customers were choosing interest-only sometimes because it was a ‘free option’; the rate was exactly the same as a P&I. But when the rates changed [to be higher], they started opting for P&I repayments.”

While Mr Bailey noted that the cap on investor loans has now been lifted, he added that he believed the trend would continue for some time to come.

“The cap has been lifted but with some pretty granular rules around the lifting. So, will we get back to 50 per cent [of lodgements being interest-only loans]? Probably not in the next few years, that is for sure.

“So, I think the ‘new normal’ is the fact that, while the cap has been lifted, there will still be that price differential and reduced appetites from consumers and the banks for interest-only loans.”

Unlike recent figures from Mortgage Choice showing that the popularity of fixed rates is increasing, AFG stats show a drop in this type of loan — from 26.4 per cent in the first quarter of FY18 to just over 15 per cent in the final quarter.

Mr Bailey continued: “A sign that regulators will welcome is the drop in loan-to-value ratios (LVRs) across the states, with the national LVR now at 67.9 per cent,” the CEO said.

Closing of the gap between lenders

The AFG CEO added that “another pleasing aspect” of the figures was that the gap between major and non-major lenders continues to shrink.

“Non-major growth across multiple categories — investors, refinancers and upgraders — suggest consumer comfort with looking outside of the big four for a lending proposition that meets their needs,” the CEO said.

“Interest rate, loan features, fees and lender criteria are all key features for a consumer evaluating their options.”

The aggregator head therefore highlighted the value that mortgage brokers have to play in the market. He said: “[D]iscounting by the major banks is lacking in transparency and the time and effort required for a consumer to obtain interest rate comparisons and negotiate for a discount is very difficult.

“The presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market.

“A consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. A mortgage broker with access to a panel of lenders drives competition between lenders to the benefit of all consumers, not just their own clients.”

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This is your chance to tell us what the non-major banks are doing well and where they should improve their broker proposition, if they are to win more of your business.

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[Related: ‘Major structural change’ in mortgages: AFG]