Ratings agency Moody’s is the latest to issue a warning on home lending in Australia, saying the rise in higher-risk loans is "credit negative" for Australia’s banks.
Moody’s senior credit officer Ilya Serov said the latest statistics from the Australian Prudential Regulation Authority highlighted an increase of investment loans and interest-only loans, posing a threat to the banking sector.
"The increase in higher-risk lending is credit negative for Australian banks because it weakens the credit quality of their portfolios," he said.
APRA’s data had discovered the proportion of investment loans as a percentage of new loans had jumped to 37.9 per cent, from a recent average of 32.6 per cent. Meanwhile, interest-only loans made up 43.2 per cent of new loans in the latest quarter, above the 35.7 per cent post-crisis average and the highest level on record.
"Although investment and IO [interest-only] loans performed well during the global financial crisis, they inherently carry higher default probabilities and severities, and a larger proportion of such loans risks leading to higher delinquency levels for Australian banks at times of stress," Mr Serov said.
Moody’s warned that rising interest rates could hamper the ability of homeowners to meet interest repayments.
"IO loans are more exposed to rising interest rates than principal-and-interest loans. Our expectation that interest rates in Australia will rise over the next 18 months means there is an increased likelihood of a payment shock for these borrowers at the end of the initial IO period," Mr Serov said.
The ratings agency also noted that higher-risk lending was primarily a concern for ‘other domestic banks’, which have outpaced system growth with their own credit growth. This group includes Bank of Queensland, Bendigo and Adelaide Bank, Suncorp-Metway and Macquarie Bank.