New changes to investor lending

The Australian Prudential Regulation Authority (APRA) has clamped down on interest-only loans in a bid to cool the hot east coast property market. The regulator said it had written to all lenders today.

From now on interest-only loans must be restricted to 30 per cent of new residential mortgage loans.
Interest-only lending represents nearly 40 per cent of the stock of residential mortgage lending by banks.
APRA said this was “quite high” by international and historical standards.

“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile,” APRA Chairman Wayne Byres said.

“We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each ADI, and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30 per cent of total new mortgage lending,” Wayne Byres said.
He said that APRA also continues to monitor the prevalence of higher risk mortgage lending more generally, including lending at high loan-to-income ratios, lending at a high loan-to-valuation ratios, and lending at very long terms or with long interest only periods (e.g. beyond 5 years).

He said the regulator believes the 10 per cent benchmark for growth in lending to investors continues to provide an appropriate constraint in the current environment, balancing the need to continue to moderate new investor lending with the increasing supply of newly completed construction which must be absorbed in the year ahead.

The new measures:

  • Limit the flow of new interest-only lending to 30% of total new residential mortgage lending, and within that place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80% and ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90%
  • Manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10%
  • Review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions
  • Continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).
  • No reduction in the 10% annual cap on investor credit growth was announced.

The increased scrutiny comes in response to an environment of heightened risks such as high housing prices, high household debt, low income growth, historically low interest rates, and strong competitive pressures.

The regulator has has advised ADIs that it is also monitoring the growth in warehouse facilities provided by ADIs to other lenders. These facilities allow lenders to build a portfolio of loans that will eventually be securitised.

“APRA would be concerned if these warehouse facilities were growing at a materially faster rate than an ADI’s own housing loan portfolio, or if lending standards for loans held within warehouses are of a materially lower quality than would be consistent with industry-wide sound practices,” Byres said in the letter.


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