What are the changes?
APRA wrote to all Authorised Deposit Taking Institutions (ADI's), which includes banks and other lenders, expecting them to:
- Limit the flow of new interest-only lending to 30% of total new residential mortgage lending;
- Manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth;
- 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).
These measures have restricted the total value of investment property and interest-only loans financial institutions can provide to their customers. To put this into perspective, when these measures were announced in March, "lending on interest-only terms represented nearly 40% of the stock of residential mortgage lending by API's", according to APRA.
How has this affected the lending market?
It seems the overall availability and attractiveness of interest-only loans has begun to diminish, highlighted by a recent drop in their stock for the first time since the Global Financial Crisis (GFC) in 2009. According to APRA, in the June Quarter of 2017, the total value of interest-only loans fell by $2.3 billion.
ADIs who are over the 30% interest-only lending threshold can, and likely will reprice their loans to control demand. This practice was evident with the out-of-cycle rate rises around July this year. It's reasonable to expect APRA's measures will continue to have an impact on price and availability.
Non-ADI's are not currently subject to these new measures. However, there are plans to provide APRA with extended powers which could lead to the implementation of these new measures for non-ADI's. This, in tandem with increased oversight of short-term bridging finance, will likely result in higher capital costs and in-turn impact price and availability among non-ADIs.
What does this mean for investors?
Whilst some institutions will be scaling back availability of investment and interest-only loans to comply with these measures, others are already below the expected thresholds. This difference in lending capacity should equate to a larger than previous variance in pricing amongst lenders.
For investors with variable rate loans and those coming to the end of fixed, interest-only periods, now is a worthwhile time to shopping around to assess your financing options.
If you'd like to have a chat about your current position in light of these changes, or see what we can do to help, contact your local Home Loan Specialist.
ABC News: http://www.abc.net.au/news/2017-08-29/interest-only-loans-drop-for-the-first-time-since-2009/8853554\
The Financial Review: http://www.afr.com/business/banking-and-finance/financial-services/shadow-banks-fear-apra-overreach-20170725-gxic07