Another day, another story of the property market surprising everyone
About 18-months ago, there were a number of dark clouds looming on the horizon. As it turns out, the property market has fairly ably just batted each one away.
(You’d have to think the property market is due for a promotion up the batting order pretty soon.)
One of those dark clouds was what came to be known as the “Interest Only Reset”.
The idea was that a large number of property owners on Interest Only mortgages were unprepared for their mortgages to ‘reset’ – to roll over to Principal and Interest.
The fear was that the reset would lead to a substantial jump in repayments. If households couldn’t afford those extra repayments, they might decided to sell.
If they all decided to sell at once, that could flood the market and prices could fall.
That was how the dark-cloud story went. Some of the doom-sayers were pushing it hard.
Turns out though, the interest only reset isn’t looking like it’s going to be all that much of a deal, and most economists are pretty relaxed about it actually.
From the ABC:
During the most recent property boom, mortgages on interest-only terms became extraordinarily popular in Australia, at their peak accounting for nearly 40 per cent of the market.
The financial regulators realised there was a risk some borrowers signing up to interest-only periods might struggle when they had to start paying back the principal.
According to the Reserve Bank of Australia, the move from an interest-only period to principal and interest repayments costs borrowers, on average, an extra 30 to 40 per cent.
If people are unable to afford the jump, they could be forced into default or into selling a property.
A lot of people doing that at the same time could lead to large falls in the property market.
So, the regulators forced the banks to massively curb how many interest-only terms they were offering.
But the RBA also warned last year that, given the huge number of interest-only loans already agreed to, there were nearly half a trillion dollars of loans resetting over four years and with the new tighter rules on interest-only terms, a lot of those borrowers would not be able to extend the interest-only period.
… So far, the concerns about the glut of interest-only terms ending at the same time have not caused a surge of loan defaults or investors fire-selling their properties, according to economist Saul Eslake.
Interest rate cuts appear to have helped turn around the market and banks are once again loosening their lending standards with the threat of the royal commission now behind them.
But Mr Eslake warns that people should not ignore the risks.
“It could be that the people for whom the transition is going to be most difficult is the cohort that is yet to make the transition, whereas those who could do it comfortably did it sooner rather than later,” he told 7.30.
“Indeed, some of the Reserve Bank work suggests that a number of people have transitioned ahead of the legal requirement to do so.
“So we’ll have to wait and see how difficult it is for the remainder.”
My guess is that with the recent round of rate cuts, most people will be ok.
If you look at the data too, it’s clear that the reset impulse has worked its way through the system.
Interest Only loans are down to 20% of the market, which is where the regulators said they wanted them to be.
So that means the chances of extending your interest only mortgage, if you can’t manage the reset, have improved substantially. Banks are much more relaxed.
So in short, it looks like we’ll be right.
Good to know.