A Change for Interest-only Loans

The Australian Prudential Regulation Authority (APRA) has announced the removal of the supervisory benchmark on interest-only residential mortgage lending banks.

The benchmark was a temporary response to concerns of a surplus of interest-only loans. As a result, the benchmark led to a reduction on the amount of new interest-only lending, which has now ducked below the 30% threshold.

The removal of the supervisory benchmark was announced by the APRA earlier this year, due to an increasing amount of authorised deposit-taking institutions (ADIs) assuring the strength of their lending standards.

ADI’s no longer subject to the investor loan growth benchmark will no longer be subject to the benchmark on interest-only lending starting 1 January 2019.

As for other ADIs, it will be removed coinciding the withdrawal of the investor loan growth benchmark.

APRA chairman Wayne Byres said, “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.”

The Australian Banking Association (ABA) is supportive of the APRA’s decision, proclaiming this move will increase choice for home loan customers and effectively improve competition across the industry.

CEO Anna Bligh has endorsed the APRA’s decision and has said it will not only benefit customers, but it has demonstrated banks that were lending prudently with the amount of interest-only loans more than halving in two years.

“APRA’s announcement shows that banks have adjusted lending to respond to concerns around an oversupply of interest-only loans, illustrating a prudential system where both banks and regulators can quickly and effectively respond to a changing environment,” she said.

“While banks will continue to lend prudently, today’s decision will mean all banks can offer more choice for customers who are looking to buy a house or apartment.

“Increased competition across the industry will mean customers have more ability to shop around for the best deal for them when looking at an interest-only home loan.”

The APRA figures representing bank home loan commitments has shown that the proportion of interest-only loans has decreased to 16.2%, which proves lower than the number two years ago (37%).

In 2015 interest-only new loans were at a record high of 45.6%, which shows the decline over the past few years.

With the removal of the interest-only benchmark, ADI’s are still required to maintain adequate oversight of the level and type of interest-only lending, and ensure it’s consistent with the APRA’s Prudential Practice Guide APG223 Residential Mortgage Lending and ASIC’s responsible lending obligations on borrower requirements and objectives.

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