APRA Scraps Interest-Only Lending Cap

The Australian Prudential Regulation Authority will ease its curbs on interest-only residential mortgage lending, it announced on Wednesday.

The supervisory benchmark was put in place as a temporary measure, leading to significant declines in lending to investors and putting downward pressure on boiling house prices and Australia’s record high household debt-to-income ratio.

The proportion of new interest-only lending is now significantly below the 30 per cent threshold APRA introduced in March 2017.

APRA will remove the 30 per cent limit from 1 January 2019, with plans to conduct a review into banks’ lending practices next year.

Related: APRA Scraps Investor Loan Growth Cap

In April, APRA removed the 10 per cent investor growth “speed limit” it had imposed in 2014.

APRA said that the removal of the caps was subject to the banks providing “certain assurances” about the strength of their lending standards.

“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” APRA chairman Wayne Byres said.

“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.”

In a letter to the banks, APRA said that its curbs had reinforced sound residential mortgage lending practices and “significantly improved” the banks’ lending standards.

The result, APRA says, is more resilient banks and better overall financial system stability.

Interest-only lending still ‘higher risk’

Owner-occupier interest-only lending remains a higher risk form of lending, the regulator said.

“APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending.

“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.”

The regulator says it plans to conduct a review of banks’ risk controls on interest-only lending in 2019 and will continue to “closely monitor” conditions in the housing market.