Westpac tightens interest-only investor loan rules

Westpac is reducing the maximum allowable interest-only term for investment property loans to 10 years.

The interest-only term could previously be extended to 15 years, according to brokers. 

In addition, the 12-year fixed rate investment property loan and its low documentation equivalent will no longer be available.

In August last year Westpac tightened its credit policies for interest-only mortgages, given it was an emerging area where financial regulators have raised concerns about bank underwriting standards.

The country's biggest lender to landlords told brokers of changes in August last year requiring new interest-only borrowers to be tested against their ability to make principal, and interest and fees payments over the "residual" period of the loan after the interest-only period had ended.

In May last year the Australian Prudential Regulation Authority chairman Wayne Byres singled out interest-only as a concerning issue.

He said that if a borrower sought a 30-year loan with a five-year interest-free period, only a minority of banks assessed the borrower's ability to make principal and interest payments over the remaining 25 years.

This was the approach Westpac was adopting.

Instead, Mr Byres said that "despite the contractual terms", most lenders assumed the borrower would make principal and interest payments over the full term of the loan.

This assumption allowed banks to "inflate the hypothetical borrower's apparent surplus income by, in our particular example, around 5 per cent", Mr Byres said.