Banks put on notice over interest-only home loans

Adam Smith 31 March 2017

danger sign1Australia’s banking regulator is cracking down on interest-only lending.

The Australian Prudential Regulation Authority (APRA) today announced new measures to curb what it sees as risky mortgage lending. The regulator announced it had written to Australian banks today to inform them of new measures it says are needed to “address risks that continue to build within the mortgage lending market”.

Chief among the new measures is a cap on interest-only lending. APRA said it would expect Australian banks to limit interest-only lending to 30% of new residential mortgage lending. It will also require banks to place strict internal limits on the volume of interest-only lending above 80% loan-to-value ratio (LVR). Banks will also have to “ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90%”.

APRA chairman Wayne Byres said interest-only lending currently represents nearly 40% of residential mortgage lending, which he said was high by international and historical standards.

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“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher 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% of total new mortgage lending,” he said.

In addition to its measures on interest-only lending, APRA said it wanted banks to manage investor lending to remain “comfortably” below the regulator’s 10% growth cap. It also asked lenders to review their serviceability metrics and continue to restrain riskier lending such as high LVR loans, high loan-to-income loans and loans over very long terms.

“Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions,” Byres said.

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