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APRA to remove IO benchmark

by Annie Kane5 minute read

The prudential regulator has announced that it will remove its benchmark on interest-only residential mortgage lending.

The Australian Prudential Regulation Authority (APRA) has announced that it is 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.

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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.

APRA revealed earlier this year that it would 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.

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.

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For other ADIs, it will be removed concurrently with the removal of the investor loan growth benchmark.

APRA chairman Wayne Byres added: “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.”

However, in a letter to ADIs, APRA wrote: "In APRA's view, interest-only mortgages, and in particular owner-occupied interest-only lending, remain a higher risk form of lending.

"As a result, APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending. These internal limits should cover both the level of new interest-only lending and the type, including lending on an interest-only basis to owner-occupiers and lending on an interest-only basis at high LVRs."

APRA noted that 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).

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

The regulator will also work to "monitor closely" the conditions in the housing market more generally.

"As with investor loan growth, a re-acceleration in interest-only lending at an industry-wide level would raise systemic concerns. In such a scenario, APRA would consider the need to apply industry-wide measures in response."

More to come.

[Related: APRA removes investor benchmark]

APRA to remove IO benchmark
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Annie Kane

Annie Kane

AUTHOR

Annie Kane is the editor of The Adviser and Mortgage Business.

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