APRA's IO loan cap abolition will allow greater choice for over charged borrowers

The announcement of the removal of the 30 percent cap for new interest-only residential mortgages will allow lenders to offer more choice for customers, leading to an increase in competition across the industry, particularly for smaller and regional banks, the Australian Banking Association chief, Anna Bligh said.

“While banks will continue to lend prudently, today’s decision will mean all banks can offer more choice for customers who are looking to buy a house or apartment. 

Average rates according to borrower 

Source: RateCity.com.au

“Increased competition across the industry will mean customers have more ability to shop around for the best deal for them when looking at an interest-only home loan,” she said. 

In terms of banks home loan commitments, the proportion of interest-only loans are now 16 percent much lower than the proportion seen two years ago at 37 percent.

Sally Tindall, research director at RateCity.com.au, noted APRA’s intervention has had a marked effect on new borrowing.

“This announcement will see banks re-open their books to more interest-only lenders, particularly investors."

But Tindall was unsure whether there would be a drop in interest-only rates to attract more borrowers.

“Banks have grown accustomed to charging borrowers more for interest-only loans," she said.

The final ACCC report into residential mortgage pricing released last week found that the big four banks collected an extra $1.1 billion over the last financial year as a result of hiking interest-only rates as since March 2017 there has been a 37 basis point average increase in interest rates on investor, interest only loans.

On average the rates are now 32 basis points above investor, principal and interest loans, and 76 basis points above owner occupied, principal and interest rates.

“We have also seen an increase in interest rates for owner occupier interest only loans that are up 33 basis points since their lows in March last year," Mozo’s property expert Steve Jovcevski said.

“While we welcome the push to improve lending standards, it’s clear the cap on interest only loans has put the brakes on the investor market.

“Coupled with the cooling of the housing markets across the country which have pulled back significantly since their peaks, it’s clear the temporary cap has done its job,” Jovcevski said.