Westpac shortens the term of interest-free loans to five years
Westpac Banking Corp’s New Zealand unit is reducing interest-only loan terms to a maximum of five years, in a market where investors are the driving force.
Interest-only loans are often used by real estate investors who make interest payments and leave the principal untouched in the hope of being able to pocket a capital gain on the sale of a home. Westpac previously allowed terms of up to 15 years, but cut it by two-thirds in the latest response to a build-up of real estate investor activity, which now accounts for around 40% of all new loans.
Simon Power, managing director of consumer banking and wealth at Westpac NZ, said the decision had two parts: making sure the bank’s loan and risk profile reflects what is happening in the market and giving borrowers the opportunity to check their repayment plans.
“There’s a risk lens, but there’s also a customer obligation lens to make sure people are comfortable with their own capabilities,” Power told BusinessDesk. “We are trying to make sure the settings are correct.”
Real estate investors have come under scrutiny in recent months as the main drivers of the acceleration in house prices, taking advantage of historically low interest rates. While this was initially focused in Auckland, it has since spread to other regions.
The Reserve Bank said last week that it could roll out its existing restriction on highly leveraged lending to Auckland residential real estate investors across the country by the end of the year, which the Bankers Association said it would be reasonably straightforward given that banks already have the systems.
Westpac was one of several banks that stopped lending to non-resident borrowers with overseas income last month, and Bankers Association chief Karen Scott-Howman said last week that lenders were already responding to market and reserve bank signals.
Figures from the Reserve Bank show that interest-only mortgages accounted for about 41% of all new loans in May, up from 38% in January when it started collecting data. Among existing home loans, interest-only mortgages totaled $ 60.82 billion as of March 31, or 28% of total loans of $ 213.7 billion.
Mr Power said the home loan market is still competitive, and while it is showing no signs of deteriorating, “we have to be careful.”
Westpac New Zealand’s gross residential loan portfolio was valued at $ 43.46 billion as of March 31, or around 20% of the total market.