Australian regulators are cracking down on risky mortgage lending as the property market heats up.
All banks and lenders will be visited by the Australian Prudential Regulation Authority (APRA) in the first three months of 2015, while the Australian Securities and Investments Commission says it will conduct a surveillance into provision of interest-only loans as part of a broader regulatory review.
The probe will look at the conduct of banks, including the big four, and non-bank lenders and how they are complying with important consumer protection laws, including their responsible lending obligations.
The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne. It comes just days after the release of the Financial System Inquiry, chaired by David Murray.
Through the Council of Financial Regulators, ASIC, APRA, the Reserve Bank of Australia (RBA) and the Treasury are working together to monitor, assess and respond to risks in the housing market.
Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5 per cent in the September 2014 quarter (this includes owner-occupied and housing investment loans), according to ASIC.
"While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt." ASIC Deputy Chairman Peter Kell said
"Compliance with responsible lending laws is a key focus for ASIC. If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action."
APRA Chairman Wayne Byres says if risky practices are identified, the banks and lenders will face increased scrutiny.
That could mean further action, including an increase in the level of capital a bank or lender must hold as a financial buffer, although those measures are not being introduced as yet, APRA chairman Wayne Byres said.
"This is a measured and targeted response to emerging pressures in the housing market," he said.
"These steps represent a dialling up in the intensity of APRA's supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual authorised deposit-taking institutions.
"There are other steps open to APRA, should risks intensify or lending standards weaken and ... we will continue to keep these under active review."
Risk is increasing in the housing market due to a combination of record low interest rates, high household debt and strong competition among lenders for new loans, APRA said.
The regulator's increased monitoring will include a specific focus on higher risk mortgages, any strong growth in lending to property investors, and loan affordability for new borrowers.
APRA said new borrowers should be able to afford a two per cent interest rate rise, and good practice would be to maintain a buffer comfortably above that level.
A strong rise in the proportion of property investors in the housing market - they made up more than half of all new mortgages approved in September - has fuelled talk of regulatory changes in the market.
The Reserve Bank of Australia has been talking to APRA about the potential use of "macroprudential" policy tools to prevent over-exuberant investors from inflating housing prices.