CANBERRA: ME Bank, which is owned by 29 industry funds, is the latest bank to ban some investors and interest-only borrowers as lenders’ respond to growing regulatory pressure and changing market conditions. It follows Citigroup’s decision to clampdown on interest only loans for overseas borrowers, those reliant on overseas income or needing approval by the Foreign Investment Review Board. Other big name lenders are believed to be planning similar strategies.
ME Bank, which has been aggressively growing its lending book, is announcing it no longer accepts investor home loans with a loan to value ratio of more than 90 per cent. It has also banned interest-only home loan applications with a loan to value ratio greater than 90 per cent including both owner occupier and investor. ME is not changing its credit policy for owner occupier principal and interest home loans. “The change in credit policy has been made to ensure ME complies with new regulations brought in by Australian Prudential Regulation Authority to manage the risks of rising house prices,” a bank spokesman said. Interest-only loans represent about 23 per cent of the nation’s owner-occupied lending and 64 per cent of investor lending, according to the Reserve Bank of Australia, which is worried about the higher average level of indebtedness over the life of an interest-only loan compared with a principal-and-interest loan. The central bank and other regulators are concerned some borrowers lack a clear strategy about repaying the loan principal and could face financial stress if their circumstances change, such as divorce or job loss, and as rates rise from record low levels. All the major banks, including Commonwealth Bank of Australia and Westpac, have introduced higher interest-only pricing, which means an average interest-only premium of 18 basis points for owner-occupied loans and 15 basis points for investor loans.
The ME Bank spokesman said its ban on some investor and interest-only loans ensures compliance with the 10 per cent speed limit on investment lending growth and 30 per cent limit on interest-only lending. “Recent changes by other banks to investor, interest-only and loan-to-value credit policies have seen an increase in demand for ME’s home loan products, including for these types of loans,” the spokesman said. Several smaller lenders are raising rates and toughening terms and conditions in response to the strain of a big spike in loan applications on their loan book and processing capacity caused by an influx of loan applications from borrowers rejected by the majors.
ME Bank has traditionally relied on securitised funding even though it has been moving to a deposit-based model since the global financial crisis. Some analysts are predicting borrowing costs will rise by 50 basis points by the end of the year as lenders cope with the tougher regulatory and funding environment. There is also the possibility the RBA could raise the cash rate. Citigroup is blaming “changing market conditions” and regulatory attempts to cool over-heating Melbourne and Sydney property markets for tightening its policies. The bank, which has a high profile in the Asian diaspora active in the nation’s real estate hot spots, is also changing the funding for loan applications that are collateralised with a mix of owner-occupied and investment property security. Interest-only repayments will only be permitted for the portion of the loan that exceeds the value of the owner-occupied security.