The nation’s banking regulator says it will remove a cap on interest-only loans for residential property.
The nation’s banking regulator says it will remove a cap on interest-only loans for residential property.

Drastic move as home loan risk shifts

THE nation's banking regulator says it will remove a cap on interest-only loans for residential property, on the grounds that the measure had reached its objective of curbing higher-risk lending practices.

The Australian Prudential Regulation Authority said on Wednesday it would remove the cap on January 1 after it "led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30 per cent threshold".

APRA introduced the limit in March 2017 amid concerns about a housing bubble. Residential property prices in Australian major cities have since fallen the most in three decades.

"APRA's lending benchmarks on investor and interest-only lending were always intended to be temporary," APRA chairman Wayne Byres said.

 

31 Kendall St, Essendon. California bungalow with four-bedrooms and two bathrooms.
31 Kendall St, Essendon. California bungalow with four-bedrooms and two bathrooms.

 

"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."

At their peak, interest-only loans accounted for 40 per cent of all mortgages. But the loans carry more risks than common principal and payment mortgages, leading regulators to tighten standards on such lending.

As a result, banks have raised rates on interest-only loans, prompting concerns about heightened pressure on borrowers.

Mr Byres said most lenders have given assurances that they have tightened their lending standards and that the authority would review their internal risk controls in 2019.

Shadow treasurer Chris Bowen said the APRA announcement, alongside recent comments from the Reserve Bank of Australia on monetary policy, underlined a number of key weaknesses in the economy including lower investment, wages and growth.

 

Shadow Treasurer Chris Bowen said concerns over interest-only loans were raised earlier this year by the regulatory body now removing the cap. Picture: Lukas Coch/AAP
Shadow Treasurer Chris Bowen said concerns over interest-only loans were raised earlier this year by the regulatory body now removing the cap. Picture: Lukas Coch/AAP

"The government, based on the advice of the Council of Financial Regulators, should be making a comprehensive statement on the economy and their actions," Mr Bowen said.

"Treasurer Josh Frydenberg needs to explain today whether or not he has expressed a view to APRA or the Council of Financial Regulators over whether APRA should end its interest-only loans restrictions.

"Earlier this year the RBA/APRA expressed concern about the potential impacts of interest-only mortgage products."

He said Labor would seek briefings from the RBA and APRA.

With Reuters


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