The chief financial officer of non-major Heritage Bank says switching from interest-only to principal and interest loans could be a counterintuitive approach to helping housing affordability.
Borrowers of interest-only loans could be required to pay an extra 30-40 per cent in annual mortgage repayments upon contract expiry according to the Reserve Bank, which would make up 7 per cent of the total housing credit outstanding.
RBA assistant governor Christopher Kent has stated he is confident in borrowers’ ability to manage a rise to their mortgage repayments, believing many will use savings they have accumulated through offset/redraw facilities or by refinancing.
Heritage Bank CFO Paul Williams said banking regulators are aware of the potential risks in the system.
“If you’re giving people more money to buy property, then it obviously inflates property values because they’re willing and able to spend more to buy the property they want,” he told The Adviser.
“The regulators get worried when a borrower can’t afford to maintain a repayment schedule and is forced to sell the property at a lower rate, as it can have a multiplier effect on broader property values.”
Mr Williams said the RBA’s economic outlook was more positive in recent times despite them leaving the official cash rate at 1.5 per cent, and say they don’t want to undo momentum with over-keen rate rises.
“They have been increasingly vocal about the next move being a rate increase, but whether or not that is an unqualified harbinger of economic growth ultimately underpins why they haven’t made a decision.”