What will the APRA mortgage lending restrictions mean for borrowers?
APRA has responded to rising house prices and increasing household debt by hitting banks with further restrictions on interest only and investor lending - which could mean ‘risky’ borrowers find their home loan applications rejected.
APRA said the changes were in “response to an environment of heightened risks, reflected in an environment of high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures.”
These restrictions mean banks must restrain lending in “high risk” sections of their portfolio, such as investment loans, loans with high LVRs or interest-only repayment loans.
"APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile," said APRA Chairman Wayne Byres.
Byres said interest-only lending accounted for nearly 40% of residential home loan lending in Australia, “a share that is quite high by international and historical standards.”
Update 4/4/17: ASIC has announced it will be monitoring and identifying lenders and mortgage brokers who are recommending high numbers of more expensive interest-only loans to borrowers. Lenders reporting to ASIC will now need to obtain more detailed information about borrowers living expenses, instead of relying on a single cost of living figure.
APRA lending restrictions: key requirements
Here are the expectations banks will now need to meet to avoid APRA enforcing additional supervisory measures:
- New interest-only lending must be limited to 30% of a bank’s total new residential mortgage lending
- Banks need to place strict limits on the amount of interest-only loans that are approved with LVRs over 80%
- For interest-only lending with LVRs above 90%, banks must ensure there is strong justification and scrutiny applied to applications
- Banks must keep investor lending numbers “comfortably” beneath the 10% growth limit set by APRA in 2014
- Banks will be required to ensure factors influencing a borrower's ability to pay off a mortgage, such as interest rate and net income buffers, are “set at appropriate levels for current conditions”
What it means for borrowers
Mozo Data Manager Peter Marshall said borrowers looking for a low deposit home loan or hoping to make interest-only repayments might find it tough to get approval in light of APRA’s restrictions.
“Borrowers who might be classified as more ‘risky’ are going to find it harder to secure a loan. And those who are approved might find they can borrow less than they might have before the new restrictions,” he said.
Banks have already been hiking home loan rates this month, with all four major banks, plus 28 smaller providers increasing rates
on mortgage products. Interest-only loans were particularly hammered in
these rate hikes, with an average increase of 0.11% for owner-occupiers
and 0.24% for investors.
“If and when there are more rate increases, it’s likely interest-only
customers will be hit with larger increases again,” Marshall said.
So if you’re in the market for a home loan, it’s more important than
ever to not only save up a deposit and have your finances sorted before
applying, but to also find a mortgage offer that best suits you and your
situation. Check out our home loan comparison table to find your match.