Interest-Only Loans Will Bail Out Flooded Farms and Homes

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Amid political pressure to restrict mortgage principal deferrals, banks say crises like the Covid shutdowns and Canterbury floods show the loans’ value to customers facing hardship.

Home loan borrowers and investors are awaiting the Finance Minister’s verdict on whether he thinks the Reserve Bank should restrict interest-only mortgages to rein in house prices and limit the risk of a crash.

The Minister is looking for a new tool, with existing tools thus far failing to make a big enough difference. This week, reports asking prices hitting new record highs in Auckland, Taranaki, Nelson and Otago, and topping $840,000 nationwide. And CoreLogic reports house values still rose 7.7 percent in the three months to the end of May, despite the implementation of tax changes and tighter loan-to-value restrictions.

Already, banks have dramatically reduced the availability of interest-only loans to residential property investors and homeowners – but the latest indications are they will be allowed to keep them as a backstop when they’re needed. This week’s devastating South Island floods are just such an occasion, they say.

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Westpac and ANZ have both announced financial support packages to personal and business customers affected by severe weather and flooding in Canterbury, that can include suspension of principal loan payments. And other banks said such measures were of value when customers faced hardship.

One borrower, Dave, said his mortgage broker negotiated interest-only terms for him when he was made redundant last year.  It had made his payments a lot easier during that difficult period.

This week, the Finance Minister’s office is indicating he never sought to ban interest-only mortgages. Rather, he had written to the Reserve Bank in March seeking advice on the extent to which they posed risks to financial stability, and whether restrictions should apply, “particularly to speculators”.

“They’re a good short-term solution for lowering servicing costs if required – changing circumstances for owner-occupied customers such as going down to one income due to having a child, losing a job, or other unforeseen setback, such as a natural disaster.”
– Stefan Herrick, ANZ

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Grant Robertson is preparing a response to the Reserve Bank. The Bank argues interest-only loans still have a place, saying in its Financial Stability Report: “Restrictions on interest-only lending would likely have less impact on overall lending conditions than alternatives, while being challenging to implement and enforce.”

Reserve Bank chief economist Yuong Ha said the Bank was looking at tools to protect the financial stability of banks and the economy – and there were more effective tools than capping the availability of interest-only loans. “We look at things through a financial stability lens, and appreciate the minister might have slightly different priorities. Sometimes they might overlap,” he told Newsroom.

“Through a purely financial stability lens, we don’t think the interest-only restrictions tool stacks up as well as, say, a DTI (debt-to-income) tool. Obviously there will be people who disagree, or agree to disagree, on the relative merits of that tool, but from where we sit, we think a DTI limit is a slightly better tool to achieve our financial stability objectives.”

The Reserve Bank argues interest-only loans are useful in crises – last year the Government set in place a 12-month scheme for New Zealanders to defer payments or principal or interest on their loans. They are also useful in construction projects, and for bridging finance (though bridging loans are becoming less common).

Australia has placed restriction on interest-only loans, but Yuong Ha said the Reserve Bank looked at such tools in the context of New Zealand’s situation. “I know the Minister has pointed to interest-only loan caps being applied in the Australian situation, so we have been aware of this tool being used overseas, but we’re trying to look at it through a New Zealand lens.”

But mortgage brokers say they are far more difficult to obtain this year. Most interest-only lending is still to investment property purchasers, said one. “it’s almost impossible for most people to qualify for a bridging loan these days.”

ANZ Bank spokesperson Stefan Herrick said interest-only loans would always have their place. “They’re a good short-term solution for lowering servicing costs if required – changing circumstances for owner-occupied customers such as going down to one income due to having a child, losing a job, or other unforeseen setback, such as a natural disaster.

“They’re still an active option for property investors depending on their investment strategy – which might be lower servicing costs but aiming for capital gain over time.

“Our preference is for most borrowers to pay back principal as well, and generally to pay down debt as quickly as they can.”

At Kiwibank, spokesperson Kara Tait said it, too, was offering tailormade support to both business and personal customers impacted by the floods in Canterbury.

“We encourage any customers that need financial support to get in touch. The exact support we offer depends on personal circumstances,” she said.

“We have offered financial support to customers in the wake of similar situations and are practised at providing financial assistance to help our customers recover where they have been, or they may be, impacted. Covid shows that this type of assistance helps customers manage financial stresses. In that case, the majority used the support to get over the short-term costs and uncertainty until they were able to service their loans again.”

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