APRA’s change to risk weights could make loans more expensive for first home buyers

But it could also bring more non-banks to the table

APRA’s change to risk weights could make loans more expensive for first home buyers

Last week the Australian Prudential Regulation Authority (APRA) proposed new banking rules aimed at promoting competition and supporting lower-risk mortgage lending through changes to risk weight settings. But while these measures could prove beneficial for some types of borrowers, customers deemed higher risk by the banks could be left paying the price.

Read more: Newly announced APRA rules to boost lending

Director of 1st Street Home Loans, Jeremy Fisher, said that while it is early days yet and therefore difficult to say, the change could affect the appetite of banks to lend to younger borrowers and property investors when it comes into effect in 2023.

“I certainly think that the majority of lenders will continue to lend to all types of clients,” he said. “But you’re going to be able to tell very easily their appetite for certain clients based on rate and based on lending ratio.”

Executive director of Connective Mark Haron said the change would likely result in higher loan costs for those deemed riskier borrowers, such as self-employed home buyers, younger borrowers and property investors – a change that could impact first home buyers who purchase with a high LVR.

“One of the key things APRA’s trying to encourage banks to do is price for risk,” he said. “They are just trying to make sure that banks carry the right amount of capital, so that if there is a problem down the track, none of the banks fall over.”

While the move may seem counterintuitive given the recent raft of stimulus aimed at bringing more first home buyers into the market, Haron said the security of the banks remains crucial.

He added that banks currently have a good appetite to lend to first home buyers – a trend that is likely to continue. However, if the proposed changes go ahead as they are now, more non-bank lenders could come to the fore.

“It creates more opportunity for the non-bank sector to come into that market. If the banks don’t want to play there, then other funders will,” he said.

The first-home buyer segment has indeed proved vital to the market over the past quarter; CoreLogic’s latest figures show first home buyer lending had a growth rate of more than 35% in the year to October, accounting for over 22% of lending during this time.

Read next: Australia’s housing market proves resilient in 2020

For Specialist Finance Group aggregation manager Blake Buchanan, the changes proposed by APRA pose many questions.

“It is my observation that, increasingly, APRA looks to adjust areas of their policy that lean more towards the competitiveness of the banking sector – and, in some cases, the consumers that it seeks to uphold trust with are the ones that pay for it,” he said.

“If we look at the GFC, any introduced measures and government guarantees were superfluous and the later investment lend weightings driven by APRA created an opportunity to reprice back books along with increasing rates for interest only and investment loans.

“We ended up with higher rates to consumers for investment loans and owner-occupied rates largely stayed the same, resulting in bigger bank profits in that segment.

“So, I guess a question that might be raised is, who is APRA now creating competition for?”

Read next: Non-banks head to Canberra over loan funding

If the regulator is doing this for the consumer, previous policy has shown to increase prices for them. And if APRA is doing this to protect ADIs, the move seems somewhat counterintuitive, he said.

“For some (ADIs) it would be like the Rockdale Rugby 2nds running out against a fully fit All Blacks squad,” he said.

Buchanan said that APRA would benefit from greater consultation with the third-party channel, adding that the regulator’s 2019-2023 corporate plan doesn’t take into account the value that brokers bring to the table for consumers.

“It clearly cites the Royal Commission nine times, broadly relating to the lack of consumer confidence which resulted in poor consumer outcomes,” he said. “Given that brokers are consecutively around 1% of consumer complaints to AFCA versus the alternative at more than 30%, it is pretty easy to conclude that, not only are brokers the consumer’s choice, but lead to better consumer outcomes.”

Buchanan added that APRA should consider the broader implications of risk weightings to the market if considering freeing up capital in order to “boost” lending.

“Potential increased pricing for first home buyers or separated people who generally have lower deposits would be detrimental to an already difficult market to break into,” he said. “Should loans be more expensive for the vulnerable even if they can repay at the same rate?”

As for claims that the change will provide additional incentive for banks to lend to small businesses, Buchanan and Fisher agree that most small businesses would benefit from this sooner rather than in two years’ time, when the changes will likely come into effect.

“APRA should be removing complex and restrictive capital requirements for small business when it is appropriate to do so,” said Buchanan. “I think that if APRA suggest that they have new policy to boost small business lending, then why wait until 2023 when it will be needed most in mid-2021?”