MNI RBA Kent: Watching Transition Away From Int-only Mortgages

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By Sophia Rodrigues

     SYDNEY (MNI) - The cashflow impact on the household sector as a whole from

the transition away from interest-only mortgages is likely to be moderate and

even less for consumption but the Reserve Bank of Australia will still continue

to monitor this closely, Assistant Governor Christopher Kent said Tuesday.

     Kent made the comments in a speech at the Housing Industry Association

breakfast in Sydney where he talked about interest-only mortgage lending which

have become an increasingly prominent past of Australian housing finance and in

recent years came under regulator's scrutiny due to its potential implications

for financial stability.

     The restrictions from regulator means many households will have to

transition from interest-only to principal and interest (P&I) mortgages over the

next few years. The RBA discussed the possible effects of the transition in the

recently published Financial Stability Review, and Kent elaborated on them in

the speech Tuesday.

     Based on the RBA's Securitisation Dataset, Kent estimates that about A$120

billion of interest-only loans is scheduled to roll over to P&I loans each year

over the next three years. This annual figure is equivalent to around 7% of the

stock of housing credit outstanding.

     The rise in scheduled payments amounts to about A$7,000 per year for the

representative interest-only borrower which Kent says is a non-trivial sum for

the household concerned.

     "But for the household sector as a whole, this upper-bound estimate of the

effect is relatively modest. Even so, there are a number of reasons why the

actual cash flow effect is likely to be even less than this," he said.

     "More importantly, the actual effect on household consumption is likely to

be lower still," he added.

     Kent said the substantial transition away from interest-only loans over the

past year has been relatively smooth overall, and is likely to remain so. 

     "Nevertheless, it is something that we will continue to monitor closely,"

he added.

     For the RBA, the main worry is about a small share of borrowers who could

face difficulties making higher payments and that share could increase in the

event that an adverse shock led to a deterioration in overall economic

conditions.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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