Interest-only loans thaw Reduced risk prompts APRA to end lending cap

THE banking regulator will remove a cap on interest-only loans for residential property, because the measure has curbed higher-risk lending.

The Australian Prudential Regulation Authority yesterday said it would remove the cap on January 1, after it “led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30 per cent threshold”.

APRA introduced the limit in March 2017 amid concerns about a housing bubble. Residential property prices in major cities have since fallen the most in three decades.

“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” APRA chairman Wayne Byres (right) said. “Both have now served their purpose of moderating higher-risk lending and supporting a gradual strengthening of lending standards across the industry.”

At their peak, interest-only loans accounted for 40 per cent of all mortgages. But the loans carry more risks than common principal and payment mortgages, leading regulators to tighten standards.

As a result, banks have raised rates on interest-only loans, prompting concerns about heightened pressure on borrowers.

Mr Byres said most lenders had given assurances they had tightened their lending standards; the authority will review internal risk controls in 2019.

Labor’s spokesman Chris Bowen said the APRA announcement, alongside recent comments from the Reserve Bank of Australia on monetary policy, underlined a number of key weaknesses in the economy, including lower investment, wages and growth.

“The government … should be making a comprehensive statement on the economy and their actions,” Mr Bowen said.

“Earlier this year the RBA/ APRA expressed concern about the potential impacts of interest-only mortgage products.”

He said Labor would seek briefings from the RBA and APRA.

Treasurer Josh Frydenberg said the benchmark and other actions had reduced the proportion of new interest-only lending well below 30 per cent.

“Given the reduction in interest-only lending and the general strengthening of lending standards by banks, APRA has determined that the removal of these industry-wide benchmarks is appropriate,” Mr Frydenberg said.

“The targeted actions taken by APRA have been appropriate and effective in enhancing the resilience of the Australian banking system.”