In a bid to calm the hot property market, the Australian Prudential Regulation Authority (APRA) has announced several measures to clamp down on interest-only loans.
All lenders have been informed by APRA that they should limit the flow of new interest-only lending to 30 percent from the total new residential mortgage lending, and to have strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 percent.
The regulator also wants lenders to manage credit to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 percent growth.
APRA chairman Wayne Byres in a statement said he believed the 10 percent benchmark for growth in lending to investors continues to provide an appropriate constraint in the current environment, balancing the need to continue to moderate new investor loan with the increasing supply of newly completed construction which must be absorbed in the year ahead.
“APRA expects ADIs (Authorised Deposit Institutions) to target a level of investor lending growth that allows them to comfortably manage average monthly volatility in credit flows without exceeding this benchmark level.”
However, additional supervisory measures, particularly about the high level of interest-only lending, are warranted, he said.
“Our objective with these new rules is to ensure lenders recognise the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions,” he said.
Byres said loans on interest-only terms represent nearly 40 percent of the stock of residential mortgage lending by ADIs – a share that is quite high by international and historical standards.
“APRA views the large proportion of interest-only lending in the current environment to be indicative of an increased risk profile. We will, therefore, be monitoring the share of interest-only lending within total new mortgage lending for each ADI and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30 percent of total new mortgage lending.
“APRA has chosen not to set quantitative limits in relation to serviceability assessments at this point. However, APRA considers it important that borrowers retain some level of a financial buffer to allow for unexpected events, in particular for borrowers that have high levels of indebtedness.
Byres said that APRA also continued to monitor the prevalence of higher-risk mortgage lending more generally, including lending at high loan-to-income ratios, lending at a high loan-to-valuation ratio, and lending at very long terms or with extended interest-only periods.
Commenting further on the announcement, the Housing Industry Association’s chief economist Dr Harley Dale said the additional mortgage lending measures announced by APRA provided a cautious and sensible approach to the home lending environment nationally.
“These measures focuses on maintaining a steady growth in investor lending with a particular emphasis on managing interest-only loans,” Dale said.
“While house prices have been rising in Sydney and Melbourne, they have been trending downwards in Perth. Similarly, rental vacancy rates and rental prices have been moving in different directions and at varying pace across capital and regional centres.
“Australia’s housing market is not homogeneous.
“The banks are well positioned to apply these additional measures and do so with a considered and targeted approach so as not to adversely affect struggling housing markets,” added Dale.
Meanwhile, Property Council of Australia chief executive Ken Morrison said APRA played a vital role in ensuring that the financial system was resilient enough to withstand external shocks. It is a part we fully support.”
“Having a balanced approach is in everyone’s interests,” Morrison said.
“However, we do note that housing approvals have fallen by 17 percent from their peak over the past eight months, so we do not see a glut of supply. In fact, we see consistent high demand in our largest cities.
“We have been supportive of previous measures undertaken by APRA in the past and understand their motivation. We will take a ‘watch and see’ approach to these changes and remain in dialogue with regulators on any unintended consequences,” he added.