APRA’s has finally got the message.
Its orchestrated credit squeeze has gone a little too far.
Now there's no argument that the regulators had to slow down the booming Sydney and Melbourne property markets, but when their macro prudential controls were combined with the bank's hesitation to lend because of the Haynes Royal Commission, this squeezed the credit market too tight, especially for property investors.
So I see the announcement that APRA will end a 30 per cent cap on the proportion of new loans that can be made on an interest-only basis from 1 January 2019 as a bid to shore up our real estate markets and avert a property crisis.
The supervisory benchmark was introduced by APRA in March 2017 to “reinforce sound residential mortgage lending practices” and make lenders’ mortgage portfolios less risky.
They correctly saw than many borrowers - both property investors and home buyers - were counting on capital growth rather than debt repayment to pay off their loans.
Clearly this was a risky strategy unless you owned the right assets.
APRA's measures were about ensuring that we weren’t giving vulnerable borrowers more credit than they could carry thus putting our banking system at risk.
But in effect, it did create a general restriction on lending and since the introduction of the benchmark, new interest-only lending has halved, prompting APRA to remove the measure which they say was always intended to be temporary.
It should give investors a wider choice of lenders and lower their monthly mortgage payments.
The announcement comes a week after APRA’s latest Quarterly ADI Property Exposures statistics showed interest-only loans had fallen to 16.2 per cent of new lending for all authorised deposit-taking institutions (ADIs).
This is down from the record high reached in June 2015 when 45.7 per cent of new loans written were interest-only.
While APRA’s interest-only cap of 30 per cent was only for new lending, the banks entire loan books are now under this mark, at 27 per cent for all ADIs.
APRA also scrapped its speed limit of 10 per cent a year on housing investor loan growth earlier this year.
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Sally Tindall, research director at RateCity.com.au, said today’s announcement is good news for investors.
“APRA’s intervention has had a marked effect on new borrowing and banks have proven that they can remain well under the cap,” she said.
“This announcement today will see banks re-open their books to more interest-only lenders, particularly investors.
“Whether they drop their interest-only rates to attract more borrowers on to their books, will be interesting.
“Banks have grown accustomed to charging borrowers more for interest-only loans. The final ACCC report into residential mortgage pricing released last week found that the big four banks collected an extra $1.1 billion over the last financial year as a result of hiking interest-only rates,” she said.
RateCity.com.au data shows that three years ago the average gap between owner occupiers paying principal and interest and investors paying interest-only was 0.20 percent. Today it is 0.57 per cent.
“With increasing anxiety over the domestic housing market, the government will be hoping this decision will help curb the falls in home lending and steady the Sydney and Melbourne housing markets.
“Investors currently on interest-only terms who were looking down the barrel of having to switch to principal and interest repayments will be hoping this gives them a reprieve as well,” she said.
APRA warned lenders that lifting the cap on interest only lending does not mean its supervision of interest-only lending practices is relaxed.
"In APRA's view, interest-only mortgages, and in particular owner-occupied interest-only lending, remain a higher risk form of lending,” APRA said in a letter to authorised deposit taking institutions (ADIs.)
“As a result, APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending,” APRA said.
“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."