APRA’s changes to interest only lending

On 31 March, APRA (the Australia Prudential Regulation Authority) initiated a suite of supervisory measures to “reinforce sound residential mortgage practices in an environment of heightened risks.”

Those risks include the combination of rising house prices, high and rising household debt, low household income growth along with low interest rates.

In an effort to improve the quality of new mortgage lending and moderate the growth of investor lending, APRA has gazetted the below guidelines by which lenders are to follow:

• Limiting interest only loans of 30% of new residential lending
• Manage lending to investors to remain comfortable below a 10% per annum growth
• Ensure that servicing metrics and income buffers are appropriate to market conditions
• Restrain growth in high risk segments such as high LVR loans and high loan to income loans.

What does that mean to the mortgage consumer?

With lenders adhering to these guidelines, we are going to see and have seen some changes in the lending landscape.

Some lenders have eliminated interest only lending for applications over an 80% Loan to Value Ratio or have avoided new deals in this space.

We have also seen heightened scrutiny over interest only applications which could very well escalate.

If you’re looking at applying for an interest only loan, we highly recommend that you are organised and patient, as there may be new hurdles to overcome as a result of these changes.

We also cannot eliminate the possibility of rate rises, particularly in the interest only and investment space.

This is not guaranteed but we do suggest that mortgage holders take on board the probability that the relatively low interest rates we have been seeing for the past couple of years will most likely have an expiration date at some point.

If you have an investment lending portfolio, no matter the size, we cannot stress how it imperative it is to have it reviewed regularly with your broker.