Sharp drop for interest-only home lending

Posted: 5 September 2017 8:49 am
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coin graph down1Regulatory restrictions are beginning to bite as lenders try to wind back on interest-only loans.

A CoreLogic report has found a sharp drop in new interest-only lending for the June quarter. The value of interest-only loans dropped 7% from the previous quarter and was down 16.7% compared to the June 2016 quarter.

The decline demonstrates the effects or regulatory tightening on interest-only home loans. The Australian Prudential Regulation Authority (APRA) has stipulated that the loans must account for a maximum of 30% of new lending by the September 2017 quarter.

“Interest-only lending is clearly an area of concern for regulators thus why a cap has been introduced. The Reserve Bank reports that around 70% of interest-only mortgage lending is utilised by investors with the remaining 30% by owner-occupiers. The main concerns surrounding interest-only lending is that the principal is not reduced during the interest-only period which results in higher overall repayments for the mortgage once the interest-only period concludes,” CoreLogic analyst Cameron Kusher said.

Interest-only loans are popular with investors, who use the loans to minimise taxation as interest on an investment home loan is tax deductible.

Despite the decline in interest-only lending, Kusher said banks were still above the 30% cap set by APRA.

“Going forward lenders will have a lot of work to do to ensure that they remain below the 30% cap. We’re quite sure that interest-only, where available, will remain a popular product; however, the availability of this product is sure to be reduced while the cap remains in place,” he said.

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