Interest only loans soar as LVR concerns ease for RBA

The proportion of interest only loans from banks hit 42.5% in the September 2014 quarter, up from 35% of investor loans early last year.

APRA's quarterly data comes as the Reserve Bank of Australia warns lending practices such as interest only loans indicate risks to banks were increasing.

But the data showed the second risk factor noted by the RBA - loans with loan to valuation ratios of more than 90% - may be easing.

Loans of this type represented 12% of new business in September down from 15% in the early part of 2013.

The recent study by Reserve Bank of Australia researchers urges both lenders and regulators to be watchful before borrowers get into trouble.

The study looked at which home borrowers, and which types of home loan, ended up falling more than 90 days behind on payments.

The findings of the research were the views of its authors, Matthew Read, Chris Stewart and Gianni La Cava, rather than the official RBA view.

Its key findings:

• The higher the loan is as a proportion of the property value when the loan is taken out, the greater the chance the borrower will fall behind.
• The probability of falling behind is particularly high for loans greater than 90% of the property valuation.
• The probability of a loan going into arrears is lower for loans that are repaid relatively quickly.
• Low-documentation loans are more likely to go into arrears.
• The higher the starting interest rate, the higher the chance the loans will go into arrears (probably because banks charge higher rates for borrowers they see as riskier, the authors say).
• The probability of missing a mortgage payment is particularly high for households with relatively high repayments compared with their incomes.