New interest-only loan changes and how they impact property investors

On the removal, APRA chairman Wayne Byres said that the 30 per cent cap, along with the 10 per cent growth cap on investor lending, was always intended to be temporary, and has now done its job of softening the investor market. 

“Both have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years,” Mr Byres said.

What does this mean for your portfolio?

In response to the cap removal, property experts were unanimous in their positivity of the cap removal for both property investors and the wider property market.

Peter Koulizos, chairman of the Property Investment Professionals of Australia called the announcement great news for property investors.

“Now they can go to the loans that they typically have gone to in the past because they've been the most tax effective and best for cash flow,” Mr Koulizos said to Smart Property Investment.

He also said it was good for the whole property market, as more investors in the market means more demand, which will lead to an improving economy.

“The last 10 years since the Global Financial Crisis hasn't been great for the economy, and with property prices dropping at the moment, that's certainly not doing much for the economy,” Mr Koulizos said.

“But this, this will go a small way towards not only improving the health of the property market but also improving the national economy.”

Adrian Kelly, in his first interview as the new president of the Real Estate Institute of Australia, said he was not surprised the cap was removed due to the current marketing softening in Sydney and Melbourne.

“It's going to be a good thing, because it gives obviously some more opportunities on where they source their funding from,” Mr Kelly said to Smart Property Investment.

He suspected that lending institutions have learnt their lessons about poor lending practices as a result of the royal commission and are currently on notice.

“I think the general public as well has probably woken up to some of the practices that have been around in previous years,” Mr Kelly said.

The REIA president also said the relaxation of the cap would bring much-needed rental properties to regional areas where they are needed most.

“There's other markets around Australia which are actually performing extremely well, so not of least of which where I live in Tasmania and South Australia for another example,” Mr Kelly said.

“So, the relaxation of that cap will certainly be helpful from an investor point of view, and we actually need more investors buying established property in a lot of the regional markets because that's where rental properties come from for tenants.”

The Property Council of Australia’s CEO Ken Morrison welcomed the cap removal and called it a “sensible step that supports the strength and stability of our financial system which is the bedrock of the property industry”.

“The availability of finance is vital to the sustainability and growth our property sector which employs 1.4 million Australians and contributes 13 per cent of our GDP,” Mr Morrison said.

“At a time when some of our largest residential property markets are cooling, APRA’s announcement provides welcome certainty and direction.

“Today’s announcement by APRA is timely, measured and underpins the importance of sound policy and governance for our financial system.”

A tough 2018

The cap on interest-only loans had a notable impact on the investor market in 2018.

According to a CoreLogic Property Pulse report, in the 12 months to September 2018 housing credit grew by just 5.2 per cent, signalling the slowest increase since November 2013.

The slowing in credit expansion is partially attributed to a fall in new interest-only lending, according to quarterly data from APRA, with more borrowers switching from interest-only to principal and interest mortgages before expiry.

These trends are reflected with interest-only mortgages making up only 28.8 per cent of total credit by June 2018, a significant fall from highs of 39.5 per cent.

While investors are overwhelmingly driving the slowdown of credit expansion at 33.1 per cent of the total credit share, this is actually the smallest credit share attributed to investors since June 2012. It is also significantly less than the peak of 38.7 per cent in June 2015.