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The Reserve Bank of Australia has warned that an increased use of mortgage brokers as a distribution channel is creating risks for lenders and borrowers.
In its Financial Stability Review, released today, the RBA said industry estimates indicate that 40 to 50 per cent of new housing loans are now sold through mortgage brokers.
“The more banks use brokers, the greater is the risk that a misaligned broker incentive structure would generate significant amounts of lending that is outside their risk tolerance or is otherwise inappropriate,” it said.
Price competition in the residential mortgage market has remained vigorous over the past six months, with lenders competing for new borrowers by offering attractive fixed rates and significantly discounting their advertised variable rates; discounts of 100 basis points or more are now widely available, the RBA noted.
“Short-term interest rate ‘specials’ targeted at specific borrower segments, such as borrowers refinancing with low LVRs, have become more prevalent,” it said.
“Banks have also increased commission rates paid to brokers and provided other incentives to their broker networks.”
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These developments have coincided with an increase in the share of loan approvals that are refinanced, as well as the share distributed through mortgage brokers.
Reports from banks and other mortgage market participants suggest that key non-price loan criteria, such as serviceability and deposit criteria, have remained broadly steady overall; the exception is that some banks recently applied stricter criteria for some inner-city apartment markets and certain mining-exposed regional towns, according to the central bank.
“Nonetheless, low housing loan rates and strong growth in investor housing credit have raised the macroeconomic risks arising from the housing market,” it said.
“For instance, speculative demand by investors may amplify the housing price cycle and increase the potential for prices to fall later on.”
In addition, the RBA fears that the rising share of interest-only loans may increase risks because “these loans are not required to amortise for a period of time, sometimes five years or longer, leaving households with more debt than otherwise.”
