Banking regulator moves to scrap limit on interest-only home loans
The banking regulator will remove its cap on interest-only mortgage lending, saying the restriction has served its purpose of reining in higher-risk loans and bolstering banks' credit standards.
With national house prices falling at their quickest pace since the global financial crisis and lending to property investors at a virtual standstill, the Australian Prudential Regulation Authority (APRA) on Wednesday said it would end a 30 per cent cap on the proportion of new loans that can be made on an interest-only basis.
APRA chair Wayne Byres said the cap - introduced last year amid fears about a boom in higher-risk mortgage lending - had been a "temporary measure," and since its introduction the proportion of new interest-only lending had halved. The share of new loans being written at high loan-to-valuation ratios had also fallen "markedly", he said.
APRA will lift the cap from January. It also scrapped its speed limit of 10 per cent a year on housing investor loan growth earlier this year.
“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary. Both have now served their purpose of moderating higher-risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years,” Mr Byres said.
The decision comes as some economists say the extent of the fall in Sydney and Melbourne house prices - which were blamed on tighter credit policies - presents a growing potential risk to household spending.
Sydney house prices are down 8.1 per cent in the past year, while Melbourne's house prices are 5.8 per cent lower, according to CoreLogic, and most economists expect the falls to continue in 2019.
The country's top financial regulators last week raised their concerns about the tightening in credit, saying some banks were being "overly cautious" in their lending.
APRA's crackdown on interest-only lending was also criticised this year by the Productivity Commission, which said the measure served to bolster bank profits, and it had a "detrimental" effect on competition, because it in effect locked in the major banks' market share.
In response to the cap last year, major banks jacked up interest rates on customers with interest-only loans, which are now significantly more expensive than other types of mortgage.
An additional concern is that interest-only loans worth hundreds of billions of dollars are set to convert to principal and interest loans over the coming years, potentially crunching some customers' cashflows and posing a threat to household spending.
In a letter to banks, Mr Byres said APRA still viewed interest-only loans as a "higher risk form of lending," and it expected banks to keep "prudent internal limits" on this type of mortgage.
The regulator said it would keep a close eye on this part of the market, and any re-acceleration in interest-only lending across the industry would force it to consider re-introducing the credit cap.