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IO restrictions see non-majors lift rates

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Lucy Dean 4 minute read

Heritage Bank is the latest entrant to the interest-only hiking club, introducing rate increases of up to 40 basis points.

Effective 14 August, Heritage Bank has lifted rates on its interest-only (IO) offerings for new investment lending, citing increased borrower interest as the cause.

Fixed IO rates for investment borrowers with one, two, three and five-year terms have grown by 0.40 per cent to between 4.89 per cent per annum (p.a.) and 5.39 per cent p.a. for new lending.

The advantage variable rates have also grown by 40 basis points to between 5.34 per cent p.a. and 5.44 per cent p.a.


The bank has also introduced an 80 per cent loan-to-value ratio (LVR) cap for IO investment loans, effective 14 August.

Michael Trencher, head of broker distribution, said that faced with a “sharp spike” in IO loan applications following rate increases at the major banks, the only “real option” open to Heritage Bank was to lift interest rates.

He explained that as the bank’s competitors increased their rates or completely stopped IO lending to comply with Australian Prudential Regulation Authority mandates, Heritage had experienced “both a jump in IO lending and a fall in the volume of principal and interest loans”.

“The result is that we now need to take action to ensure that we remain within the cap that APRA has imposed for new interest-only lending.

“Lifting interest rates is the real option open to us to slow growth in interest-only loans.”


A number of lenders including Virgin Money, Teachers Mutual Bank and its subsidiaries, and Westpac and its subsidiaries have all increased rates following the APRA directive to keep new interest-only lending to below 30 per cent of banks’ loan books.

[Related: It ‘no longer makes sense’ to recommend IO loans]

IO restrictions see non-majors lift rates
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