Government clamps down on interest-only lending

Early on this calendar year, in response to high housing prices and early signs of mortgage stress appearing in households, APRA (Australian Prudential Regulator) wrote to Authorised deposit-taking institutions (banks, credit unions etc.). APRA’s aim was to ensure that banks’ lending policies are in line with best practice standards & mitigate potential risks, ensuring mortgage stress will not play a pivotal role in any potential economic downturn in future.

Government’s (APRA) requests

• ‘Interest-only’ loans should be limited to 30% of all new residential loans and
• The need to have a low internal limit on interest only loans that are greater than 80% LVR
• Extra scrutiny and justification is needed in any instances of interest-only lending with a 90%+ LVR (Loan to Valuation Ratio)
• Continue to manage investor lending such that investor loan growth remains below the 10% growth benchmark.
• Ensure that serviceability metrics such as interest rate, net income buffers, using relevant living expenses etc. are set at appropriate levels for current conditions.
• Restrain lending in higher-risk portfolio segments (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms – i.e. greater than 30 years).

The banks’ response

These are the actions banks have taken in order to comply with APRA’s initiatives:

• Providing differences to the interest rates charged for Principal residence loans vs. Investment loans. Banks have been increasing interest only rates, whilst in some cases decreasing ‘Principal & Interest’ rates.
• Reducing the interest only periods on loans provided – e.g. from 10 years ‘interest only’ to 5 years ‘interest only’.
• Amending LVRs. Lenders across the board have tightened their LVRs (to as low as 50% on certain forms of lending).

What you should do

• Should you have a principal residence loan which is based on interest only payments, it might be prudent for you to consider seeking advice on changing it back to ‘Principal & interest’ payments.
• For any loans that you have on ‘interest only’ payments, you need to be conscious of how you tackle the increased payments once the ‘interest only’ period expires and the loan moves towards the ‘Principal and Interest’ mode.
• If you are on ‘Interest only’ payments due to cashflow constraints, it is advisable to seek advice now as 1) interest rates are expected to increase in the medium term and 2) repayments will be significantly greater once your Principal and Interest period kicks in.

References

• Australian Prudential Regulatory Authority APRA2017, “APRA announces further measures to reinforce sound residential mortgage lending practices”, 31 March 2017, Australian Prudential Regulatory Authority, Sydney, viewed 28 July 2017 from <http://www.apra.gov.au/MediaReleases/Pages/17_11.aspx>.
• Kaplan Professional, “Credit and Mortgage Broking Regulatory update”, August 2017, Kaplan Professional, Sydney.