Morning Briefing: 25% cut to interest-only lending

APRA’s decision to limit interest only lending will require a hasty response from lenders, whilst ASIC increases surveillance of brokers

Morning Briefing: 25% cut to interest-only lending
APRA’s decision to limit interest only lending will require a hasty response from lenders, with potentially dire consequences for borrowers

Interest-only lending will need to be cut back by almost a quarter to meet APRAs’ new 30% limit, it has emerged. On Friday APRA wrote to banks demanding they limit new interest-only lending to 30% of new residential mortgage lending. Interest-only lending currently accounts for 39% of all new lending, with some lenders even more exposed, meaning the resulting 9% cut is likely to be disruptive to brokers and borrowers.

Interest-only borrowers have already been targeted by multiple rate hikes. IO rates are up to 22 basis points higher than P&I rates from the major banks, according to an analysis by comparison website Mozo. On average investors with IO loans have endured rate hikes of 32bp; owner occupiers with IO loans saw a 15bp increase in their interest rates. 

Mozo property expert Steve Jovcevski warns that existing interest-only borrowers may struggle to renew their interest-only period with their banks. “Many owner occupiers and investors who took at out an interest only loan in the early stages of the property boom, are now being left in the lurch as they find out they no longer qualify for an interest-only loan today under these tighter lending standards,” says Jovcevski. These tightened lending standards include limits on IO lending at LVRs of more than 80% and particular oversight for those above 90%.

Repayment challenges

APRA’s changes could leave interest-only borrowers unable to meet repayments, warned Jovcevski:  “These borrowers will be stung by significantly higher loan repayments, the equivalent of several Reserve Bank rate hikes, as they make the transition over to a principal and interest loan. This could see many not being able to afford their home loans and having to sell up or try to refinance at a higher rate.”

Banks and building industry associations have welcomed APRA’s restrictions however: the Housing Industry Association’s chief economist Dr Harley Dale “Australia’s housing market is not homogeneous”, pointing to weaker conditions in Perth. “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.” 

Westpac’s CEO Brian Hartzer told the Australian Financial Review that restrictions in IO lending wouldn’t affect his bank’s profitability; Bendigo and Adelaide CEO Mike Hirst said the move would help the RBA keep official rates low, which would be good for business.

**Breaking** this morning ASIC announced they will soon conduct "targeted industry surveillance" to ensure brokers do not inappropriately recommend interest only loans to customers, using data from lenders to identify guilty brokers. More on ASIC's website.