What will new interest-only lending restrictions mean for investors?
The Australian Prudential Regulation Authority (APRA) announced on Friday that lenders will have to limit new interest-only loans to 30 per cent of new residential mortgages.
This is on top of previous measures to limit new lending to investors to 10 per cent growth.
I’ve discussed the restricted lending environment before and these measures will certainly tighten conditions even further.
Why is this happening?
Part of the issue appears to be that interest-only loans are about 40 per cent of all residential lending in Australia, which is high by international standards.
While investors generally opt for interest-only loans given it is the interest component that is tax deductible, there would still be a proportion of homeowners who have this type of loan as well.
Given that lenders are independently ramping up rates anyway, I wouldn’t be surprised if homeowners and perhaps some investors switch from interest-only to principal and interest loans, which will naturally reduce the proportion of interest-only loans.
It is also important to recognise that interest rates remain historically low, so many investors and homeowners who choose to switch to principal and interest loans will likely have few problems with mortgage repayments.
The announcement didn’t include any information about existing interest-only borrowers and I doubt that serviceability assessments of all current mortgage-holders is achievable nor even necessary in the short- to medium-term.
Clearly, there remains some concerns – whether they are valid or not – about some segments of some markets, but rampant price growth is really just a Sydney story and to a lesser extent parts of Melbourne.
What are the consequences?
There’s no doubt that the lending environment is undergoing change, but that is usually a cyclical situation when a market such as Sydney is nearing its peak.
The one thing that I am yet to see from any of our regulators, other than statistics of worldwide behaviour, is where have any client outcomes been affected? These measures are meant to “protect” us, but how do they? If we have a growing population and net migration increasing rapidly, don’t people have to live somewhere? And if it’s now too hard for first homebuyers to enter the market then who’s going to provide the housing? That’s right – investors!
When will the government and the regulators see common sense and admit this? It’s a little farcical, as we need to grow our country to provide for an aging demographic, but now we are limiting those who can assist to meet these demands.
And don’t get me started on the negative gearing debate, let’s leave that for another time!
There are still plenty of banks prepared to lend to solid borrowers, especially if they’re purchasing investment-grade properties.
But it remains vitally important for investors to seek out experts because they need to ensure they’re working with people who are professionals within the property investment space.
The APRA changes
The new APRA changes are as follows:
APRA wrote to lenders in last March advising that it expects banks to:
- limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending, and within that:
- place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent; and
- ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent;
- manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth;
- review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and
- Continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).
While some of these measures I believe are prudent, such as interest-only loans being restricted for loans greater than 80 per cent LVR, the unmeasured restraints being applied by regulators without any rationale or reason is of a concern to us. As is the ability of the country to meet the future housing demands in a population that is growing faster than all other global economies.
After all this, who is actually holding the regulators accountable to these changes without any specific measurements?
Watch this space everyone, there is more to come…
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