30% Limit On Interest-Only Residential Mortgage Lending Lifted

From 1 January 2019, APRA will remove its 30% limit on interest-only residential mortgage lending for banks and other lenders. The cap was put in place in March 2017, in a bid to improve lending practices, and has resulted in a marked reduction in the number of new interest-only loans, which is now significantly below the 30% threshold.

The royal commission, teamed with tougher regulatory conditions from APRA, has definitely added to the difficulty accountants and clients face in accessing finance.  In September 2018, interest-only loans represented 16.2 per cent (or $61.2 billion) of new home loan approvals.  This represents a 54.9 per cent reduction from the last quarter.

In short, the lifting of the cap opens up opportunity and competition in the lending market for investors in 2019.  Mortgage Brokers believe this will enable them to provide clients with more options for investment.  The cap restricted access to lenders offering interest only residential mortgages, reducing competition among lenders.  In some cases it was as cheap to do principal and interest as it was to do interest only.

However, all told the caps have done their job of educating investors about the pros and cons of interest-only loans.

There is no indication that the lifting the cap will result in an increase in investors seeking interest-only arrangements but it does provide investors with a larger array of options. It is believed that it has achieved it’s intent to raise awareness with investors – to be mindful of product and structure, and ensure it meets the long term goals of the investor.

APRA warned lenders that lifting the caps will not mean its supervision of interest-only lending practices will be relaxed.  “In APRA’s view, interest-only mortgages, and in particular owner-occupied interest-only lending, remain a higher risk form of lending,” APRA said in a letter to authorized deposit taking institutions (ADIs).

“As a result, APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending,” APRA said. “These internal limits should cover both the level of new interest-only lending and the type, including lending on an interest-only basis to owner-occupiers and lending on an interest-only basis at high LVRs.”

There is a belief that the change will not spark an increase in interest-only loans in today’s market climate.

Thoughts From Our Principals

Mark Semmens

Mark is a Chartered Accountant with a wealth of experience in accounting and taxation. Mark is a Member of Chartered Accountants Australia and New Zealand, the Tax Practitioners Board and the National Tax and Accountants Association.

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Daniela Semmens

Daniela Semmens is a Co-Director of Semmens & Co. and joined the company as General Manager in 2017. Daniela is an Affiliate Member of Chartered Accountants Australia and New Zealand and also a Member of the Australian Institute of Project Management.

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