APRA scraps IO loan requirements on lenders but with warning

The Australian Prudential Regulation Authority (APRA) has removed its supervisory benchmark on interest-only residential mortgage lending by authorised deposit-taking institutions (ADIs).
The benchmark was put in place as a temporary measure in March 2017, as part of a range of actions over recent years to reinforce sound lending practices.
The introduction of the benchmark has led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the required 30 per cent threshold.
Earlier this year, APRA announced its intention to remove the supervisory benchmark on investor loan growth subject to ADIs providing certain assurances as to the strength of their lending standards.
Most ADIs have now provided those assurances, APRA noted.
ADIs that are no longer subject to the investor loan growth benchmark will also no longer be subject to the benchmark on interest-only lending from 1 January 2019. For other ADIs, it will be removed concurrently with the removal of the investor loan growth benchmark.
APRA Chairman Wayne Byres said APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary.
"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.”
Notwithstanding the removal of the interest-only benchmark, ADIs still need to ensure they maintain adequate oversight of the level and type of interest-only lending, consistent with APRA’s Prudential Practice Guide APG223 Residential Mortgage Lending and ASIC’s responsible lending obligations on borrower requirements and objectives.
Byers noted interest-only mortgages, and in particular owner-occupied interest-only lending, "remain a higher risk form of lending."

APRA plans to conduct a review of ADI risk controls on interest-only lending next year, as part of a broader assessment of improvements that have been made in lending standards.

"A re-acceleration in interest-only lending at an industry-wide level would raise systemic concerns," Byers noted.

"In such a scenario, APRA would consider the need to apply industry-wide measures in response."

As a result, APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending.

APRA stressed interest-only periods should be of limited duration, particularly for owner-occupiers, and serviceability assessments should test borrowers’ ability to repay principal and interest over the actual repayment period (excluding the interest-only term).

RateCity.com.au recently noted data showing that three years ago the average gap between owner occupiers paying principal and interest and investors paying interest-only was 0.20 percent.

It is now 0.57 percent.

It is possible the move will see property investors face more financing options in 2019.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

APRA Interest-only Loans

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