Interest-only borrowing booms

Property

New official Reserve Bank figures reveal that about 40% of new mortgage lending in this country is done on interest-only terms

27th Jun 16, 4:00pm by David Hargreaves

By David Hargreaves

New official figures from the Reserve Bank have revealed that around 40% of new mortgages by value are being taken out on interest-only terms.

The RBNZ has been collecting the information for over a year but has not previously published it.

The figures for May show that $2.996 billion worth of interest-only loans were taken out, which represented about 41.1% of the $7.287 billion worth of mortgages advanced.

And, separately, the RBNZ's latest figures for mortgage lending by loan to valuation ratio show that last month investors accounted for nearly 47% of new lending in Auckland, up from a touch under 46% in April.

The Auckland investors borrowed $1.85 billion of the total $3.946 billion borrowed in Auckland during May.

The proportion of investor buyers both in Auckland and through the country as a whole has been rising sharply during the current housing boom.

The RBNZ said that in terms of the whole country, in May 2016, over half of new lending for investor purposes was on interest-only terms. The RBNZ said these proportions have been fairly steady over time. "Only 1% of interest-only lending for investor purposes is above 80% LVR and this has been declining over time," the RBNZ said.

The RBNZ says interest-only loans are defined as having no scheduled repayments. This includes loans where borrowers independently choose to repay principal such as revolving credit loans which have a fixed limit.

Regulators in Australia became concerned when interest-only loans hit more than 40% of new lending across the ditch.

In December 2014 The Australian Prudential Regulation Authority (APRA) warned lenders it was "dialling up the intensity" of its supervision to reinforce sound residential mortgage lending practices. And the Australian Securities and Investments Commission (ASIC) said then it would "conduct a surveillance" into the provision of interest-only loans.

The RBNZ said in May 2016, almost 60% of all new mortgage lending was on principal-and-interest payment terms, while 40% was on interest-only payment terms.

"These proportions have been fairly stable since July 2015 when the data was first available (Figure 1).

The RBNZ said interest-only loans "tend to convert to principal-and-interest loans after a period of time".

"In March 2016, 40% of new lending was on interest-only payment terms.

"However on the banks’ loan books only 28% of all existing mortgages are on interest-only payment terms. These proportions have been fairly steady over time (Figure 2)."

The detailed figures show that as of the March quarter, banks had $213.704 billion outstanding in mortgages, of which $60.821 billion (28.5%) was on interest-only terms. The proportion of interest-only loans has been gradually rising. It was just under 28% in the September quarter.

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54 Comments

by Zombie ponzi | 27th Jun 16, 4:25pm 1467001503

Scary stuff. This is a ticking time bomb, just like US adjustable rate and interest only loans were in the lead up to the sub prime crisis.

Figure 2 shows that existing interest only is creeping up with each month that goes by...tick tock tick tock...must...keep....ponzi....going....

by Independent_Observer | 27th Jun 16, 4:39pm 1467002382

And we're going to continue to deny that we're in a credit-powered super property bubble?

by moa man | 27th Jun 16, 4:56pm 1467003388

Interest only loans?
It's not a real loan then.

by Independent_Observer | 27th Jun 16, 5:28pm 1467005310

It's just like paying rent to a landlord - and you forget about the capital that you have to pay back at some point in time...

In the mean time, you sit pretty, in the fantastically over-priced P.O.S house you've just bought in dorkland.

by Eco Bird | 27th Jun 16, 5:33pm 1467005636

Mr Ponzi, there are one-on one books in economics , I suggest you do some reading and look up the meaning of Ponzi first... ... interest only loans are REAL LOANS and usually taken up by investors and No, it is not a ticking bomb at all ... Oh, and it is used by smart investors not noobs!

by Zombie ponzi | 27th Jun 16, 6:05pm 1467007516

Eco Turd, I suggest YOU open a book and do some learning. You are confusing what is known as Ponzi finance with a Ponzi scheme.

Look up Minsky's borrower types, in short;
- the "hedge" borrower has sufficient income to repay interest and principle
- the "speculative" borrower has sufficient income to make interest payments but not repay the principle
- the "ponzi" borrower does not have sufficient income to make either interest or principle repayments

In Auckland there are very few new investors (borrowing now) who are "hedge" borrowers, there are many "speculative" borrowers and many "ponzi" borrowers (who are interest only AND having to top up loans using their day-job income).

Maybe next time instead of hurling insults you could engage in a reasoned response as to why it is not a ticking time bomb in your view?

by notaneconomist | 28th Jun 16, 12:29pm 1467073770

ZP you are forgetting the tax system!

If a landlord pays off debt he/she will also have to pay taxes on that portion.
House prices are increasing which means the owners are inflating away from their debts.......who in their right mind would pay down debt and incur taxes when they can increase their portfolio and use a LTC which allows them to transfer other income into their housing portfolio?

by Zombie ponzi | 28th Jun 16, 1:40pm 1467078039

I completely agree that interest only makes sense from a tax minimisation perspective.

Where I take issue that if (when) house prices stop rising materially the investor is left with a cash flow negative/neutral investment with no prospect of repaying the principle from cash flows. Yes rents might rise over time but if it is that marginal it will still take 40+ years to pay off.

Also, we're talking about fresh borrowing, so nothing has inflated away yet for current borrowers.

I think it all comes down to whether you fundamentally believe house prices will continue to rise materially over time.

by rjf | 28th Jun 16, 11:35am 1467070538

So the flatters are renting from the master tenant who is renting from the landlord who is renting from the bank who are renting from the central banks and foreign investors. At each layer no value is being added.

Seems sensible to me..

by Zoltuger | 27th Jun 16, 5:48pm 1467006539

Wow I wonder whether Inland Revenue has thought of requesting a dataset from banks of interest only mortgage holders with high turnover. Would show speculators clear as day

by Uninterested | 27th Jun 16, 6:58pm 1467010713

Yes exactly. To me that shows intent to flip the house. (Sooner or later). But almost certainly when house prices start to drop. When house prices start to drop, it will be amazing how many peoples "circumstances change"!

by Cowpat | 27th Jun 16, 6:35pm 1467009301

RBNZ being very coy about stability of IO loans . In 2014 Westpac on providing 30 year interest only loans disclosed 25 percent of it book loans were interest only. ANZ, BNZ were below the 25 percent. In the following 5 quarters interest only loans have ballooned to 28.5 percent , an additional 16 Billion in IO loans. Its all about flow and stock, the RBNZ should not be so deceptive in its reassurance . IO loans work extremely well when prices are rising and indeed when for investors the property remains rented .Any downturn in either of these or indeed the economy in general the IO loans will be the first to go as these will have been maxed out . Obviously the RBNZ requiring a savings/investment account to run alongside the IO loan would strenghten the case for the capital to be repaid if something were to hit the fan, but this will not be contemplated because by default house prices would start to fall,. Keep buying.

by Madan Chugh | 27th Jun 16, 6:41pm 1467009703

Are falling house prices masking something more worrying?: This is main news on www.yahoo.com.au The house prices all over Au are falling indicating some kind of worry for interest only investors when interest will go up and won't have return to serve interest and market will not be suitable for selling. This type of economic conditions are not good for country often lead to unpredictable result , surprising NZ govt is in denial mode and do not really care about consequences of sharp increase in property prices. The Govt does not want to take a decision as it appears to hurt their vote bank. It is time to wake up else consequences may not prove beneficial to any one.

by Uninterested | 27th Jun 16, 6:53pm 1467010406

Sh!t
Even 28% sounds imprudent to me.
No safety margin with these loans at all.
And its these loans are the ones that our term deposits are balanced against!

by Uninterested | 27th Jun 16, 7:13pm 1467011600

The other thing is that this news item talks about proportions. So the absolute value of interest only loans must be increasing given that the mortgage books are increasing.

by Penguin | 27th Jun 16, 7:21pm 1467012061

Sooner the banks are stopped from issuing interest only mortgages the better. It was stopped in the UK post GFC.

by moa man | 27th Jun 16, 7:35pm 1467012939

But banks can do as they please. Who can stop the banks?
Not likely to be the bank shareholders, way to much to lose.
IO loans will only stop when reality hits home on the banks.
But then the banks will then cry poor and the taxpayer bails them out.
The taxpayer always foots the final bill.

by BadRobot | 27th Jun 16, 7:31pm 1467012699

Perhaps interest only loans may be our sub-prime...

by evita | 27th Jun 16, 7:45pm 1467013528

Warning, am sure RBNZ will take note of it. Will it do sometning about it is a question mark. This data proves that defintaely this 41% is not investors but speculators - real number will nbe much higher.

This is one more tool with RBNZ.

Will someone do something now and if not than why collect data.

by bigblue | 27th Jun 16, 8:01pm 1467014507

Investors and first home buyers have been doing interest only for years.

What is more of a worry is the ballooning credit card debt where people are only paying the minimum payment with some banks even dropping the minimum payment from 5% of balance to 2.5% of the balance. This debt is unsecured!

At least the equity in these investor interest only loan properties has increased massively in the last 12 months - an investor paying $300,000 in Hamilton with a 100% financed interest only loan a year ago now has a property worth $375,000. With a return like that on zero initial investment it is no wonder the interest only loans are popular.

by Uninterested | 27th Jun 16, 8:57pm 1467017847

Yes but that 75 grand can evaporate (and become negative) overnight if another Lehman incident or something else strikes..

by Mystery | 28th Jun 16, 5:29pm 1467091752

And a person can die while crossing the road, doesn't means that we shouldn't cross roads. Your money can get wiped in the sharemarket, doesn't mean we shouldn't invest in the sharemarket. The value of your currency can decrease by more then 10% (as with GBP a few days ago), doesn't mean we should not hold any money in any of the world's currencies. Gold can plummet in value too, doesn't mean that we shouldn't buy gold. Any investment we make has some potential to rapidly drop value in an extreme scenario, doesn't mean we shouldn't invest. Everything has RISK, investors who take the risks get rewarded for doing so

by Madan Chugh | 27th Jun 16, 10:38pm 1467023938

because get full tax refund through out

by Sluggy | 27th Jun 16, 10:57pm 1467025065

and once the credit card debt gets to high it gets consolidated into the home loan.

First home buyers ? Interest only Really ? First home speculators maybe.

by bigblue | 27th Jun 16, 8:04pm 1467014655

Pre 1987 sharemarket crash you needed about 30% deposit, could only do Principal and Interest loans and max term for 25 years and payments could not be more than 25% of your income. If banks had stuck to those rules house prices would be well below where they are today.

by Uninterested | 27th Jun 16, 8:59pm 1467017956

In the absence of regulation, the banks have been "innovative"

by ham n eggs | 28th Jun 16, 12:23pm 1467073426

entirely true. There is a flip side though - for the last 25 years we have needed debt growth to help extract energy - ie the end of the cheapest ever energy was mid 70's. Since then, we have needed expanding debt to elevate commodity prices so that we can get Oil out of the ground.
Lack of debt growth now is going to hammer our energy supply big time soon. Then chaos.

by sharetrader | 28th Jun 16, 5:32pm 1467091970

yes but 90% of buyers were also from within NZ

by Zeds are Us | 27th Jun 16, 8:16pm 1467015377

We've known about this rort for a long time and plenty are wading into it.

Taxpayers are getting screwed by bankers and land lords with the blessing of the government.

How can 45% or so of 4 million or so sheep be wrong?

by Roy1 | 27th Jun 16, 8:37pm 1467016621

For any changes will have to wait till next election but the denial govt who wants to do nothing willl have to be tolerated till next year and just hope for the best.

by Rob | 28th Jun 16, 12:53am 1467032017

Isn't it fine though if you can sell for more than it was purchased for. But in reality their are property cycles, and prices can go down. National can only keep denying there is a housing crisis for so long. maybe they are hoping they will be out at the next election, so they never have to. Brexit voting though shows what happens when the government of a country loses touch with the majority of the country.

by keywest | 28th Jun 16, 1:23am 1467033825

the majority of the country owns homes hence don't want anybody tinkering with home ownership...why should a property investor (or any investor) pay for the inability of the 'have nots' who either by fear or ineptitude have not designed their own retirement saving plan...

by Independent_Observer | 28th Jun 16, 10:08am 1467065309

Because they can't afford to because of greedy idiots like you! Wake up and smell the coffee KW

by keywest | 28th Jun 16, 1:24am 1467033870

Interest only loans allow property investors to buy a property they otherwise would not be able to afford and in 5 years time once the rents go up then they can look at turning on the principal payments...

by keywest | 28th Jun 16, 1:37am 1467034679

if the banks do this by the book a (evil) property investor would have to outlay $300,000 to buy a $1,000,000 home, hence then pay a mortgage on $700,000, on top this they have to pay: Rates, Insurance and Upkeep (tax deductible) The point is these (evil) guys are taking on a lot of risk but at least have stumped up the cash and $300k is a lot of safety margin on equity in case it all turns to custard, property investors are not getting a free ride, they need to pay to be in the game, although this website makes out you just turn up to the bank with a Chinese sounding name, with no money and 'boom' you are an (evil) property investor with an interest only loan...when actually your are a 30% equity holder in a low to medium risk financial investment that helps New Zealanders remain productive and free to live where they want, because if you want to artificially clamp down on property investors then you better like living in crapville because nothing on the market will be affordable for you to live when you are renting, the minute you touch my properties with more fees, stamp duties & taxes I will 100% pass this onto the tenants...

by Independent_Observer | 28th Jun 16, 5:23am 1467048221

What a load of bollocks KW. It's mentally deluded that landlords think they're are the heros in this predicament.

by Zachary Smith | 28th Jun 16, 7:32am 1467055941

At least we Landlords are actively doing stuff and taking risks instead of writing inane comments all the time and whining like a little crybabies. You haven't had the guts to invest in a house and now you are just burning up with jealousy over how much other people have gained by being in the game.

From your comment above:
In the mean time, you sit pretty, in the fantastically over-priced P.O.S house you've just bought in dorkland.
How can we take you seriously? Auckland is a premium city in a premium country. It's going to be expensive. It's a very nice place with very nice houses. Lots of people want to live here - fact. And will pay high prices - fact!

by PocketAces | 28th Jun 16, 7:57am 1467057459

How does taking risk, most especially with residential housing benefit anyone, other than you? I am taking your writhing like a cut snake at any suggestion of the grossness that the housing market has become, means you know full well you are part of the problem, not the solution.

by Zachary Smith | 29th Jun 16, 6:36am 1467138983

I'm not in the game to benefit other people. I'm tired of the socialist nonsense spouted on this forum and your crazy bolshevik "solutions"..
I'm also super pro Auckland so will react angrily to comments that disparage it. If Auckland houses are "P.O.S" then there are plenty of cheaper, better value, places down country. If one has that attitude about Auckland then why worry about it?
I also don't buy the argument that everything is going to come crashing down because prices are high in Auckland. There are millions of millionaires in the Asia Pacific region with many wanting to buy real estate here and in Australia. Most of NZ's wealthy are in Auckland too.

by Independent_Observer | 28th Jun 16, 9:41am 1467063714

'Actively doing stuff and taking risks'. You landlords and property speculators, those who are taking interest only loans, are digging a hole for not just themselves, but for the entire country. Not all of want to be involved in your greed and corruption. Now those that can see this for what it is are 'whinning little crybabies' if we say something about it? How corrupt! I don't want to be in this hole that you're digging for us. I say stop digging, and stop digging now. But then I realise, we're digging a hole to China!

by Zachary Smith | 29th Jun 16, 6:46am 1467139614

Your argument will be better if you don't call Auckland "Dorkland". That''s kind of juvenile.
If I stop digging foreign speculators will own most of the housing stock eventually. Is that what you want?

by keyo_ | 28th Jun 16, 10:02am 1467064971

The landlords aren't creating any wealth at all. At most they might install some new carpet. It's people like me who pay for it all. I work 8 hours a day writing software then come home to a shitty rental where I can't have a dog or install a picture hook. I pay for single mothers with 6 kids, entitled pensioners and property "investors" alike.

by keywest | 29th Jun 16, 1:23am 1467120231

haha...yes everything in life is free including carpets...

by keywest | 29th Jun 16, 1:22am 1467120169

If 'hero' can be defined as adequately providing for my family and many other families with clean & warm accommodation then I thank you to...

by frazz | 28th Jun 16, 9:26am 1467062817

Some of us take risks and start business and employ people, export products, create services, pay taxes.
I think the Brixet is just the start of a major reset...hope you are buckled in.

by dictator | 28th Jun 16, 11:45am 1467071111

I prefer being on the business side adding productivity as well. Landlords are, for the most part, investing in existing housing and not adding productivity. They do generate some work for contractors, although not a large amount. A substantial amount of landlords are using their investment housing for tax write offs to convert income into tax free capital gains.

We need more productive people in New Zealand creating designs and technology something that is lacking at the moment.

by keywest | 29th Jun 16, 5:54am 1467136475

I work full time and have never lived in a house I own, I am thankful that there are landlords are out there that can give my family a safe, warm place to sleep...so I can be more productive each day...

by SmoKey | 28th Jun 16, 10:16am 1467065811

It all boils down to Risk Management for both the Lender and the Borrower. Usually the borrowers are not enlightened enough about this, but Lenders are supposed to be. Are they ignoring it or do they know something which we don't know ?

by John | 28th Jun 16, 11:45am 1467071131

So I have 4 loans a facility for $100k, Fixed interest 1 year interest only 100k, Fixed interest 2 year interest only 100k, Fixed interest 3 year interest only 100k. with repayments only made to the first loan. Looking like a speculator until I add that annual repayments are 100k plus interest, after 1 year, loan 1 will be repaid, loan 2 becomes floating and repayments will be made to the 2nd loan which will have come off fixed rate and so on.
Structured for certainty and circumstances, yet 75% of my present borrowings are interest only.

by Simon | 28th Jun 16, 11:49am 1467071369

Anyone with mortgages for both own home (NOT TAX DEDUCTIBLE) and rentals will (should if rational) be interest only on rentals and pay max possible on own home eg shorten term to 10 years or less.

Nothing risky or speculative. At 4% and likely to fall I'm in no hurry to pay any principle esp when I earn 8% on that borrows money in God's cash machine that is pn real estate.

by RDee | 28th Jun 16, 5:40pm 1467092418

Very nice - similar vein, but no where near the repayment figures. I also have all my loans on IO, but have a large offset floating facility that is nearly cancelled out by my transaction account. I move balances over when loans roll over. IO allows me to manage cashflow and make principle payments when it suits me. Smarter way of doing things IMHO.

by Zachary Smith | 29th Jun 16, 6:42am 1467139354

That's exactly how I operate as well. No one really talks much about the "large offset floating facility" and its role in all of this. That gives Landlords peace of mind as it will allow plenty of time to re-arrange things if circumstances change. No need to panic sell in the case of an unforeseen expense or cash flow problem.

by keywest | 29th Jun 16, 9:19am 1467148744

I have all my properties on 30 year table as only rent so no benefit as don't have a principal home

by Averageman | 29th Jun 16, 3:13pm 1467169990

Leverage is fantastic on the way up. On the way down its simply equity destroying cancer. When the banks finally realise they are about to be the emperor with no clothes, lending will tighten, business confidence will drop, a few of team ponzi will lose their jobs, and the trickle of forced sales will turn into a torrent. Add in a market primed to see just how low it can go, how can interest only be anything but pure greed aligning with raw stupidity.

Consider the Italian Banks who are getting press for the mess they truly are, and then consider remaining PIG's who have been hiding under the blanket of EU helicopter money. They are still a mess. Could Brexit be the first card in the house of cards that is world debt primed to become an unstoppable cascade of unwinding chaos? And…let’s not forget the potential of Donald arriving on the scene and dropping a few random "your fired" into world finance. Truly - you couldn't make this stuff up.

The PIG's are in the crap because of the endemic tax avoidance in those countries. New Zealand's property debt interest tax offset is simply that - avoidance of tax. Debt interest tax offset should be an election issue next year unless Winston and the mess that is the Left, are truly far stupider than they look. One does admit this issue sailed through the last election untouched, perhaps Winston and the remains of the Left really like the opposition benches, or as unrepresentative of their traditional voters that might be, are protecting their own self-interest/portfolios?

Reaching for popcorn, waiting for gravity to kick in – what goes up….