Over a third of NAB and ANZ customers have made ‘early conversions’ out of their interest-only home loans

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  • Data from ANZ and NAB’s full-year results give an update on the shift away from interest-only (IO) loans following APRA restrictions 18 months ago.
  • 33% of NAB IO customers made ‘early conversions’ into principal and interest loans in that time, while 42% of ANZ borrowers did the same.
  • Interest-only lending peaked in 2015, which means IO loan conversions are expected to pick up over the next two years.

This week’s full-year results from two of Australia’s big four banks shows the shift away from interest-only lending has commenced.

A meaningful proportion of borrowers are even getting ahead of the game, and shifting into principal & interest repayments before their five-year IO loan term expires.

However, there’s still likely to be plenty more transitions to come over the next couple of years.

The pending shift out of IO loans has been one of the main narratives in Australia’s housing market since APRA enacted interest-only lending restrictions in March last year.

One of the concerns cited about the shift away from interest-only loans was how it may affect the outlook for consumption — the biggest component of GDP.

Earlier this year, Moody’s estimated that switching into a P&I loan could increase borrower costs by a substantial 30%.

However, data provided by ANZ and NAB indicates the switch has accelerated since APRA’s restrictions. And so far, the economy has been resilient to the changes.

NAB has converted $25.5 billion worth or mortgages from IO to P&I since March 2017, of which one-third were “early conversions”:

Source: NAB investor presentation

It was a similar story for ANZ, which had a big spike in early conversions in the six months following the 30% cap on IO loans.

The bank has converted $38 billion worth of IO mortgages since March 2017, of which 42% were early conversions.

However, extra data provided by ANZ showed the amount of interest-only loan terms set to expire will remain high over the next two years:

Source: ANZ investor presentation

And Citi said the changes made by ANZ haven’t done much for its bottom line.

The bank’s “Australian mortgage market share collapsed in 2H18 as ‘Interest only’ mortgage product and pricing settings drove borrowers elsewhere,” Citi said.

“The benefits of recent announced back-book re-pricing might need to be spent on rectifying mortgage growth.”

The majority of interest-only mortgages have a loan term of five years. So given that interest-only lending peaked in 2015, most industry analysts forecast that the switch in P&I loan repayments will remain a key talking point through to 2020.

Particularly amid the ongoing housing market downturn, which saw annual price falls in Sydney accelerate at the fastest pace since 1990.

Westpac’s results are next up on Monday, with the IO component of its mortgage book sure to get plenty of attention. Westpac has the highest percentage of interest-only mortgages among the big four banks.