The Australian Prudential Regulation Authority (APRA) has today announced a plan to remove its 30% benchmark on interest-only residential mortgage lending from January 1, 2019.
The temporary ‘speed limit’, originally introduced in March 2017, was implemented by APRA in response to concerns over lending practices by Aussie banks and the soaring cost of property prices in major cities at the time.
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According to the authority, since its introduction the lending cap has led to a ‘marked reduction’ in the proportion of new interest-only lending, which now sits well below the 30% threshold.
“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” said APRA Chairman, Wayne Byres, in a statement released this morning.
“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.”
What could the move mean for interest-only rates?
Since March 2017 when APRA’s measures were first put in place, interest-only home loan rates for both owner occupiers and investors have jumped.
According to the Mozo database, the average interest-only rate for an owner occupier (based on a loan amount of $400,000 and an LVR of 80%) in March 2017 was 4.50%*, while the current average is 4.83%.
The same upwards trend has played out for investor interest-only loans, with the average rate in the Mozo database having soared from 4.75% in March 2017 to a current average of 5.12%.
However, according to Mozo’s Product Data Manager, Peter Marshall, that trend might be about to reverse for investor interest-only home loans.
“Rates have already been falling for investors making principal and interest repayments, but APRA’s announcement is likely to result in lenders reducing interest-only rates, mostly for investors,” he said.
“Owner occupiers can still expect to pay a decent premium for interest-only loans, but I think investor interest only rates are likely to start coming down by a meaningful amount.”
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*Rates have been rounded to two decimal places.