A consultation paper from the Basel Committee on Banking Supervision has proposed substantially higher capital requirements on investment loans, which could trigger higher mortgage rates if implemented locally.
Craig Mackenzie, CoreLogic RP Data’s executive general manager of commercial, said the paper is extremely important as it sets out the committee’s minimum international expectations with respect to the capital treatment of a range of asset classes.
“Of particular relevance to the Australian market is the proposed new capital treatment for residential mortgages,” Mr Mackenzie said.
“The most controversial aspect of the consultation paper is the Basel Committee’s proposal to levy higher capital on a subset of investment loans,” he said. “Not just marginally higher – two to three times higher than for a like-for-like owner-occupied loan.”
Mr Mackenzie said the committee has defined these loans as one where "repayment is materially dependent on cash flow generated by the property”. However, the paper does not define what this phrase means in any further detail.
“In Australia, lending institutions use, on average, 80 per cent of the estimated rent from the investment property towards serviceability,” he said.
“It is likely many investment loan applications in Australia wouldn’t pass servicing without at least some portion of the rental amount having to be relied upon.”
Mr McKenzie said it would be difficult for the Australian prudential regulator, APRA, not to adopt some form of differentiated capital treatment for investment loans.
Otherwise, APRA could be seen to be acting in a way that was inconsistent with, and less conservative than, the international benchmark.
“If that is the case, then APRA will need to carefully think through its approach and the flow-on market impact in terms of the availability of credit and pricing for investment loans,” he said.
Australian lenders acted almost unanimously in mid-2015 to raise the price of investor loans and tighten eligibility requirements.
The Basel Committee consultation paper closes for comment in March.