Recent increases in the interest rates charged by Australian banks on residential property investment loans and interest-only (IO) loans are credit positive for Australian covered bonds and new RMBS, Moody’s said today (Monday).

In response to regulatory pressure, Australia’s big four banks and other major mortgage lenders increased the interest rates on residential property investment loans and IO loans for both new and existing customers in July and early August.

Meanwhile, some mortgage lenders lowered maximum allowable loan-to value ratios and introduced stricter serviceability tests on investment and IO loans earlier in the year.

“The higher interest rates will restrict growth in investment and IO loans – which are riskier than owner-occupier and principal and interest loans – and therefore reduce the proportion of such loans in Australian covered bonds and RMBS pools,” said Robert Baldi, Moody’s assistant vice president and analyst.

In addition, Moody’s said the rate increases will improve the credit strength of covered bond issuers, as they will result in a rebalancing of bank mortgage portfolio loans towards these safer investments and are positive for their net interest margins and profitability.

Noting that existing cover pools and RMBS loan pools already have a lower proportion of investment and IO loans than banks’ total mortgage portfolios, Moody’s said it expects changes in total mortgage portfolios to reduce this proportion further, which it said is a credit positive.

In terms of net interest margins, Moody’s said, curbing investment or IO lending is particularly positive for issuers with significant investment or IO loan portfolios, such as Westpac (45% investor loans) and NAB (47% IO loans and line of credit facilities).

The rate increases followed a ruling from the Australian Prudential Regulation Authority (APRA) in December that indicated the annual pace of investor loan growth should not exceed 10%.

Banks were continuing to exceed this speed limit as of the end of July, Moody’s noted, adding that the 10% level is not a hard limit and is intended to be a trigger point for more intense supervisory action.