Statistical overhaul creates mortgage time bomb

George Lekakis Finance regulation

Around 100,000 Australian home borrowers could be hit with rate increases on owner occupier mortgages after up to A$70 billion worth of home loans were reclassified as investment borrowings by the banking regulator.

Details of the mortgage time bomb were confirmed to Banking Day yesterday by major banks.

Under a new statistical collection system introduced recently by APRA, the definition of what constitutes an “owner occupier loan” has been tightened to include only a borrower’s primary place of residence.

Loans used to purchase holiday houses and apartments as “secondary residences” no longer meet the “owner occupier” definition and are now officially classified by banks as exposures to investment borrowers.

The acute impact of the reclassification is apparent when data published in the July edition of APRA’s monthly banking statistics are compared to the regulator’s June dataset that was collated using the old definitions.

The statistical reclassification affects customers at each of the major banks, but Westpac borrowers appear to be the most exposed to the risk of having their home loans repriced at higher rates.

According to the July edition of APRA’s monthly banking statistics, Westpac suffered a $38 billion decline in the value of owner occupier loans on its books, while the reported value of investment loans rose by $32 billion.

As a result, the proportion of the bank’s home loan book now exposed to investment borrowers has blown out to 45 per cent compared to 36 per cent before the new statistical method was applied.

The statistical  complexion – and arguably the risk profile - of home lending at the other major banks have also been transformed.

CBA, which suffered a $21.5 billion decline in owner occupier loans in July, saw its exposure to investment borrowers climb to 35.6 per cent from 30 per cent.

Sources at several major banks confirmed to Banking Day on Tuesday the profound impact the loan reclassifications could have on their future regulatory capital requirements.

If the reclassified loans eventually attract higher capital charges then banks would be forced to reprice them in line with standard investment rates.

Rates on principal and interest investment mortgages offered by the major banks are currently around 0.6 per cent higher than for standard owner occupier home loans.

APRA is presently consulting licensed financial institutions on a proposed new risk capital framework due to be implemented in January 2022 and has flagged that it will impose significantly higher capital requirements on investor loans compared to owner occupier mortgages.

The regulator views investment mortgages as riskier assets for banks to retain on their balance sheets.

Banking Day understands that the changes in the way the banks’ mortgage books have been classified will influence APRA’s reworking of its capital regime but is likely to have no bearing on capital requirements of banks in the short term.

Moreover, the regulator has not finalized the extra capital burden that licensed lenders will be required to set aside on each new investment loan they write.

Banks say if they are forced to stump up more regulatory capital for the reclassified mortgages then they would be forced to pass on additional costs to borrowers through higher rates.

“That’s where we are probably headed, but we’re hoping that APRA is able to exercise discretion so that these loans - from a risk capital perspective - are treated as owner occupier mortgages,” one major bank source said.

“We will certainly be arguing our case for that to happen because most of the loans that have been reclassified really exhibit the characteristics of an owner occupier loan where the borrower is not deriving any rental income from the property.”

National Australia Bank and ANZ borrowers are also exposed to repricing risks.

NAB’s owner occupier home loan book declined by $9 billion in July, while its investment mortgage book rose by $10 billion.

ANZ had up to $11 billion worth of owner occupier mortgages redefined as investor loans.