The mortgage broking industry has welcomed the news that the prudential regulator is to remove its benchmark for interest-only loans but suggested that this will not result in an influx of demand unless rates drop too.
On Wednesday (13 December), the Australian Prudential Regulation Authority (APRA) announced that it will be removing 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.
According to APRA, 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 30 per cent threshold.
Indeed, APRA’s latest Quarterly ADI Property Exposures statistics revealed that interest-only loans accounted for just 16.2 per cent of new lending for all authorised deposit-taking institutions (ADIs).
“Since the introduction of the benchmark, the proportion of new interest-only lending has halved, and interest-only lending at high loan-to-valuation ratios (LVR) has also declined markedly,” the regulator said in a letter to ADIs.
“In summary, as with the benchmark on investor loan growth, this measure has served its purpose.”
All eyes on interest rates
Several leading brokers welcomed the announcement but suggested that the removal of the cap would not result in a spike in demand for this type of loan, unless lenders reduce the interest rates on IO loans.
Marshall Condon, mortgage broker and director of Victoria-based brokerage Neue Black, told The Adviser that the removal of the cap was “probably overdue” given the decline in investor and interest-only lending over the past year.
“It is a positive overall, because it means we are finally seeing a bit of a loosening of the tight grip on investor/IO loans,” he said. “It will give people more of a positive sentiment knowing that the banks are now able to lend to investors again, or at least to people wanting to do interest-only, the majority of whom are investors.”
He added that while the company would be advising clients of the change, he said that the cap “wasn’t the thing that really impacted our customers, it was more that the pricing changes off the back of the introduction of the cap”.
Mr Condon elaborated: “The banks increased their interest rates on IO and investor loans to slow down their flows when the cap came in.
“Generally speaking, when the changes came in, the majority of the time it just wasn’t really palatable for clients to look at an interest-only loan because of the rate differential. I think the rate differential had more of an impact rather than the cap – but that was partly due to the banks taking advantage of that benchmark.”
He continued: “I don’t think we’re going to see a spike in interest-only loans until that price differential disappears. It is my point of view that the removal of the cap therefore won’t have too much of an impact on people getting interest-only loans.”
Touching on APRA’s suggestion that IO loans were “higher risk”, Mr Condon said that this was only the case if borrowers “do not have a strategy in place and know how to use the IO as a structure to help you”.
He therefore added that brokers were well placed to help mortgagors navigate that strategy.
“The key for us, as brokers, is really still about understanding what their strategy is and making sure that the structure is appropriate for them based on what they’ve told us. There is no real blanket rule, every client that comes in has their own strategy and what they are trying to achieve, so it is about listening to that and understanding what their future goals are,” he said.
Similarly, broker and managing director of Sydney-based broker Atelier Wealth, Aaron Christie-David, said that the move by APRA was "significant" in that it signalled that the benchmark had not only worked, but perhaps had even made lending "too restrictive".
"It’s no surprise this cap has been removed given we are experiencing a slowdown in lending, falling house values in Sydney and Melbourne and the RBA saying lending has become too tight," he said.
"The positive impact will be the ability for existing interest-only mortgagors, specifically investors, to refinance to another interest only loan."
Mr Christie-David, who has previously warned of an impending IO "danger zone", said that this policy change meant that it would appear "investors can start to breathe a bit easier knowing this restrictive benchmark has been lifted and they will have more options available".
"The challenge will be gauging lender’s appetites to take on more interest-only loans, knowing the heavy scrutiny these loans have attracted," he said.
Mortgage broker and Pink Finance owner Nicole Cannon also welcomed the change, stating: “The cap restricted how many lenders we could use, and some priced investment lending so that it’s not competitive. In some cases, it’s almost just as cheap to do principal and interest as it is to do interest-only.”
Ms Cannon added that she believes the caps have “done their job” of educating investors about the pros and cons of interest-only loans.
“I don’t think lifting the cap will mean investors flock back to interest-only arrangements, but it does open up the conversation and options. I think the awareness is now out there to be mindful of product and structure and ensure it meets your long-term goals,” Ms Cannon said.
Several representatives from the lending and property industries have also welcomed the news, with Australian Banking Association CEO Anna Bligh stating that the decision “will mean all banks can offer more choice for customers who are looking to buy a house or apartment”.
“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.
Sally Tindall, research director at RateCity.com.au, said that the announcement would “see banks reopen their books to more interest-only lenders, particularly investors”, adding that it would be “interesting” to see whether lenders drop their interest-only rates to attract more borrowers on to their books, given that they have “grown accustomed to charging borrowers more for interest-only loans”.
[Related: APRA to remove IO benchmark]
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers.
As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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