On 1 January 2019, Australian Prudential Regulation Authority (APRA) removed its restrictions on Interest-Only residential mortgage lending.
The restrictions were put in place as a temporary measure back in March 2017, to reduce the level of Interest-Only lending and improve the quality of lender’s mortgage portfolios.
So why have the Interest Only restrictions been removed now?
APRA announced the move late in 2018, just weeks after CoreLogic figures showed Australia’s housing market recorded its weakest conditions since the Global Financial Crisis (GFC).
National dwelling values slipped by 0.7% over the month, led by Sydney where the drop was double the national average.
Whilst industry commentators suggest restrictions have been lifted to prevent any further market decline, APRA is claiming the restrictions have been lifted because because they’ve had their intended impact.
APRA says the restrictions have led to a marked reduction in Interest-Only lending, which is now significantly below the 30% target of all home loans. In addition, lending standards have improved.
Was the restriction removed for all lenders?
The 10% restriction on investor loan growth was removed for lenders who have proven the strength of their lending standards.
Lenders who passed APRA’s test no longer need to meet Interest- Only restrictions.
The restrictions will remain in place for others however, until strong lending practices can be proven.
“APRA’s lending benchmarks on investor and Interest-Only lending were always intended to be temporary,” says APRA Chairman Wayne Byres.
“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.”
What impact could this have on lending overall?
When the Interest-Only restrictions were introduced, lenders curbed borrower appetite for these types of loans by increasing Interest-Only rates AND implementing a host of policy changes which made it harder for borrowers to qualify for lending.
However, due to the focus on the Royal Commission, responsible lending practices and increased scrutiny of a borrower’s monthly expenses, many believe that the easing of APRA’s policy is unlikely to have a major impact to overall lending.
This is because the wide-spread lending policy changes we’ve seen recently (which are NOT likely to be reversed any time soon) have made it harder overall for borrowers to quality for a loan – regardless of the rate.
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You can read more here:
https://www.apra.gov.au/sites/default/files/letter_residential_mortgage_lending_interest-only_benchmarks.pdf
https://www.abc.net.au/news/2018-12-19/apra-variable-housing-interest-rates-1/10634772
https://www.afr.com/business/banking-and-finance/apra-removes-interestonly-lending-cap-says-its-served-its-purpose-20181219-h199rk
