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The banking regulator is set to remove its caps on interest-only lending, a move which is tipped to open property investors to more choice of financing options in 2019.
From 1 January next year, APRA will remove its 30 per cent limit on interest-only residential mortgage lending for banks and other lenders.
This cap was originally put in place in March last year in a bid to reinforce sound lending practices, and has resulted in a cooling down of the interest-only lending market.
According to APRA, the introduction of the benchmark has led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30 per cent threshold.
What does this mean for property investors?
In short, this move opens up opportunity and competition in the lending market for investors in 2019.
“This enables us to have more conversations with clients about the choices that they’ve got, and the options for them with their properties,” mortgage broker and owner of Pink Finance, Nicole Cannon, told Smart Property Investment.
“The cap restricted how many lenders we could use, and some priced investment lending so that it’s not competitive. In some cases it’s almost just as cheap to do principal and interest as it is to do interest only," she added.
Ms Cannon believes the caps have “done their job” of educating investors about the pros and cons of interest-only loans.
“I don’t think lifting the cap will mean investors flock back to interest-only arrangements, but it does open up the conversation and options. I think the awareness is now out there to be mindful of product and structure, and ensure it meets your long term goals,” Ms Cannon said.
Approach with caution
APRA warned lenders that lifting the caps will not mean its supervision of interest-only lending practices is 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 authorised 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."
More to come.
Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.