The banking regulator has removed the interest-only benchmark for residential mortgages, claiming the benchmark has “served its purpose”.
Installed in March 2017 to curb risky interest-only lending, the benchmark required lenders to keep new interest-only lending to below 30 per cent of all new lending.
The regulator, APRA, today said the benchmark has “served its purpose” with the portion of new interest-only loans now significantly below the threshold.
What’s the deal with interest-only loans?
Interest-only loans are home loans which don’t require any repayment of the principal of the loan, only the interest. Often these have a set period like five years, after which the loan reverts to a typical principal and interest loan.
Borrowers generally end up paying more in interest because they’re not reducing the principal, but operate off the assumption the property will increase enough in value to make the decision worth it.
However the regulators and the Reserve Bank of Australia also agree the risks of interest-only loans extend beyond the borrower.
“Other things equal, interest-only loans can carry greater risks compared with principal and interest loans,” the assistant governor of the RBA, Christopher Kent said earlier this year.
“Their value as a form of mortgage finance has limits.”
He said borrowers are faced with higher repayments at the end of the interest-only period and if they’re not prepared for this, there’s a risk they won’t be able to pay the loan and will need to sell.
An influx of sales like this could be destabilising.
However the speed-limit prompted many interest-only borrowers to switch to principal and interest loans, partly due to a series of interest-only rate hikes levied by the banks.
Property pundits also argue the benchmark softened overall investor activity and has contributed to the weakening property market.
‘Lending benchmarks were always temporary’
Speaking this morning, APRA chairman Wayne Byres explained the interest-only speed-limit was only ever a temporary measure.
He said it, and a similar limit on investor lending, have both served their purpose of “moderating higher risk lending” while supporting improved standards.
The limit on investment loans was removed earlier this year.
The Australian property market continues to soften, with Sydney house prices falling 9.6 per cent from their 2017 peak.
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