UBS: All of Australia's changes to investor lending rules are increasing the risk of mortgage fraud

Of course we’re owner-occupiers. Source: Orion Pictures

The latest housing data reveals a slowdown in investor loan growth, although the changes underway may pose other risks.

Housing finance data for June, released yesterday by the RBA, shows that growth in investor lending slowed in June, while loans to owner-occupiers increased.

Taking a close look at the numbers, UBS analysts Jon Mott and Rachel Bentvelzen said that monthly growth in investor lending slowed to 0.41% in June from a peak of 0.76% in December.

However, the slowdown in overall home lending hasn’t been nearly as steep. The RBA’s figures show that annual housing credit grew by 6.6% for the year to June 2017, only just below the 6.7% growth seen at the same time last year.

The numbers show that investor credit has slowed at the same time as loans to owner-occupiers have increased. This chart from UBS tells the story:

Given that lending to first-home buyers is still near record lows, Mott and Bentvelzen said that part of the increase in owner-occupier loans could be explained by existing home-owners upgrading to bigger properties.

Then they added an interesting kicker, suggesting [our emphasis added] that the smaller overall fall in housing finance implied that “some investment borrowers are telling their lender they intend to occupy the property to benefit from lower interest rates”.

In other words — borrowers could be engaging in a bit of mortgage fraud to try and dodge the higher interest rates applied to investor loans (particularly interest-only investor loans).

“While it is plausible that there has been an increase in upgraders, we would not be surprised if borrowers are tempted to apply for or re-classify themselves as owner-occupiers given the approximately 60 basis point differential in interest rates between owner-occupier and investor loans,” the analysts said.

It’s an issue first explored by Mott and Bentvelzen last October. Their research revealed that almost one third of prospective borrowers said that their mortgage application “wasn’t factually accurate”.

A closer look at the chart above shows growth in owner-occupier loans climbed more steeply immediately following the introduction of investor lending restrictions by APRA in April 2015 and April 2017.

Indeed, the RBA addressed the sheer scale of the switch to owner-occupier loans in their release of housing finance data yesterday.

“Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan,” the RBA said.

“The net value of switching of loan purpose from investor to owner-occupier is estimated to have been $55 billion over the period of July 2015 to June 2017, of which $1.3 billion occurred in June 2017.”

Despite the introduction of macro-prudential measures to control systemic risks in the housing market, the figures suggest that both banks and housing investors have shown the capacity to get creative in order to get home loans approved.

This chart from UBS shows the difference in mortgage rates charged to investors and owner-occupiers:

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