More than 100,000 mortgages face potential interest rate hikes after the Australian Prudential Regulation Authority (APRA) reclassified owner-occupied mortgages such as unrented holiday homes and apartments as investment properties.
Under a new statistical collection system announced in July, APRA ruled that from January 2022 the definition of an owner-occupier loan can only include a borrower's primary place of residence and not any additional property that was allowed under previous rules.
Westpac is most exposed to the changes, with the most recent APRA's banking statistics showing the lender suffered a $38 billion decline in the value of owner-occupier loans on its books, while the value of investment loans rose by $32 billion.
The online financial newsletter Banking Day has crunched the APRA numbers and has found that Westpac's home loan book now has a 45 per cent exposure to investment borrowers compared to 36 per cent before the new owner-occupied definition was applied.
Banking Day associate editor George Lekakis told the ABC's AM program that the higher exposure could see banks forced to increase their capital requirements given the riskier nature of investment loans with the added cost burden passed on to borrowers.
"It's a bit of a time bomb — a ticking time bomb," Mr Lekakis said.
"Based on the signal that APRA's given, these reclassified loans are now considered investment loans, and they should attract a higher capital impost. And when that happens, the rates on those loans will go up.
"At the moment, investment borrowers are paying something like between 0.6 and 0.8 per cent more than an owner-occupier borrower.
"That's a pretty low differential at the moment, because we're in a declining rate environment. But if rates were to start going up, I'd expect to see that differential widen."
Banks assessing impact of changes
A Westpac spokesman said it was too early to comment on the impact of changes definition, but would be cooperating with APRA during the consultation period.
Commonwealth Bank responded to APRA's announcement on August 30 saying there would be "no impact on customers, the security and serviceability arrangements for housing loans".
Behind the scenes lobbying has already begun given the potential impact of the definition changes with borrowers yet to be informed that the status of their holiday homes or apartments could change.
"The banks [have not yet] begun to inform those potentially affected borrowers about this situation. That's because the banks are waiting for APRA to clarify what the future capital treatment will be for those loans," Mr Lekakis said.
"What borrowers will need is time so that they can make a rational decision as to whether they want to service a higher cost mortgage going forward."
According to Banking Day, sources within major banks have confirmed the "profound impact" the loan reclassifications could have on future regulatory capital requirements.
APRA would not comment on the potential impact of the changed definitions and referred the ABC to its update to banks on the new rules that are now subject to consultation.
Follow Peter Ryan on Twitter @peter_f_ryan
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