APRA says IO loans now sit at 1 in 5 loans

The APRA benchmark of no more than 30 per cent of new lending by Australian banks being on interest-only terms was not overly restrictive for borrowers who genuinely need the form of finance.

While roughly 1-in-3 loans granted can still be on an interest-only basis, APRA boss Wayne Byres advised last week that data for the last quarter of 2017 shows that only about 1-in-5 loans were interest-only.

Byres said it had required the major interest-only lenders to establish strategies that incentivise more borrowers to repay their principal.

"The industry has been quite successful in doing so:, and the number of interest-only loans with high LVRs continued to fall to quite low levels.

"All of that is positive for the quality of loan portfolios," he told the A50 Australian Economic Forum dinner.

"While the direction in asset quality is positive, we’re not declaring victory just yet.

"We still want to see that the improvements the industry has made are truly embedded into industry practice.

"And we can modify our interventions as more permanent measures come into play.

"That will include, amongst other things, further strengthening of borrower serviceability assessments by lenders, strengthened capital requirements for mortgage lending imposed by us, and comprehensive credit reporting being mandated by the Government.

"Through these initiatives, we are laying the platform to make sure prudent lending is maintained on an ongoing basis," he said.

Lending restrictions put in place by APRA on interest-only loans cost borrowers $500 million a year, according to the Productivity Commission.

In its draft report released following its review into competition in the Australian financial system, the PC has suggested that macro-prudential measures introduced to reduce IO lending were “blunt interventions."

“We estimated that the cost borne by taxpayers as a result of changes in home loan investor rates following APRA’s intervention on interest-only loans in 2017 was up to $500 million per year,” the PC report reads.

The PC claimed that the regulator’s measures boosted lender’s profits, reduced market competitiveness and hiked interest rates.