As a mortgage broker, I think the banks view APRA as Santa Claus. Let me explain. As you know, APRA has been putting the pressure on lenders to reduce the amount of Interest Only lending to cool investment property lending. So what did the banks do to reduce the amount of IO lending? Put up interest rates for both new and existing lending. So what was the effect? Even greater super-sized profits and half a billion dollars lost in extra tax write-offs at tax time.
Rob Burgess whom I follow as an economics and financial literacy expert writes that A lack of competition in the banking system has allowed banks to double their returns on some mortgages while costing taxpayers up to $500 million a year in increased negative gearing tax write-offs according to a new report.
The draft report, released by the Productivity Commission shows how “blunt” intervention in the interest-only mortgage market ended up producing “windfall” profits for banks.
The report noted: “The Australian Prudential Regulation Authority’s (APRA’s) actions to slow interest-only lending on residential property in early 2017 resulted in higher interest rates on both new and existing residential investment loans, despite the regulatory objective being to slow new lending.
“This led to a windfall gain for the banking sector. Up to half of this gain is in effect being paid for by taxpayers, as interest on investment loans is tax-deductible.
“The Commission estimates that the cost borne by taxpayers as a result of APRA’s intervention was up to $500 million a year.”
The report added: “The ROE [return on equity] on interest-only investor loans doubled … to reach over 40 percent after APRA’s 2017 intervention.”
The wide-ranging report highlights a lack of price competition in banking, which effectively means “consumers have lost their market power to shareholders”.
It notes: “Much of what passes for competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and ‘white labels’.”
It notes that due to a lack of price competition, “Australia’s major banks have delivered substantial profits to their shareholders, over and above many other sectors in the economy and in excess of banks in most other developed countries post-GFC.”
The report argues that the ‘four pillars’ model of regulation of the banking industry “is an ad hoc policy that, at best, is now redundant”.
On a more brighter note, we are starting to see a “thawing out” around investment property lending. That is, for the first time in many years there are now not one but 2 lenders that offer 95% loans as Interest Only for investment properties. So don’t let the big 4 make extra profits out of your property aspirations. Give me a call on “123456789” to discuss your situation.