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APRA removes cap on interest-only home loans

The Australian Prudential Regulation Authority (APRA) has announced it will end a 30 per cent cap on the proportion of new loans that can be made on an interest-only basis, saying it was a ‘temporary measure’.

APRA chair Wayne Byres said that since the introduction of the cap the proportion of new interest-only lending had halved and that the share of new loans being written at high loan-to-value ratios had fallen markedly.

The cap will be lifted from January.

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 announcement comes a week after APRA’s latest Quarterly ADI Property Exposures statistics showed interest-only loans had fallen to 16.2 per cent of new lending for all authorised deposit-taking institutions (ADIs).

RateCity.com.au research director Sally Tindall said the move is in a bid to steady the home loan market, and is good news for investors.

“APRA’s intervention has had a marked effect on new borrowing and banks have proven that they can remain well under the cap,” she said.

“This announcement today will see banks re-open their books to more interest-only lenders, particularly investors.

“Whether they drop their interest-only rates to attract more borrowers onto their books will be interesting.

“Banks have grown accustomed to charging borrowers more for interest-only loans. The final ACCC report into residential mortgage pricing released last week found that the big four banks collected an extra $1.1 billion over the last financial year as a result of hiking interest-only rates,” she said.

In response to the cap, major banks increased their interest rates on customers with interest-only loans, which led to the Productivity Commission saying the move by APRA had a ‘detrimental’ effect on competition and only served to increase bank profits.

Mozo.com property expert Steve Jovcevski said the move should be welcomed in the industry, especially with investors, as the cap had ‘put the brakes’ on investor activity.

“There might finally be some good news for investors in 2019, with rates on interest-only loans likely to fall following APRA’s decision to remove its 30 per cent cap,” said Mr Jovcevski.

“Since March 2017 we have seen a 37 basis point average increase in interest rates on investor, interest-only loans. On average the rates are now 32 basis points above investor, principal and interest loans, and 76 basis points above owner-occupied, principal and interest rates.

“We have also seen an increase in interest rates for owner occupier interest-only loans that are up 33 basis points since their lows in March last year.

“Coupled with the cooling of the housing markets across the country, which have pulled back significantly since their peaks, it’s clear the temporary cap has done its job,” Mr Jovcevski said.

Mr Byres did say the regulator still viewed interest-only loans as a ‘higher risk form of lending’ and it expected banks to keep ‘prudent internal limits’ on the number of them issued.

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