BANKS have been slapped with new limits on interest-only and investor lending as the banking regulator responds to heightened risks of rising housing prices and household indebtedness.
The Australian Prudential Regulation Authority has written to all banks today saying it expects them to tighten their lending practises.
APRA chairman Wayne Byres said the measures would help protect the economy.
"Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions," he said.
The key new rules require the banks to:
- limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending, and within that:
- place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent; and
- ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent;
It will also force banks to manage lending to investors so as to remain "comfortably" below the previous benchmark of 10 per cent growth.
Banks will also be required to ensure that serviceability metrics – factors that influence a person's ability to pay down a mortgage, such as income and interest rates – are set at "appropriate levels" for current conditions.
They will also need to continue to restrain lending grown in "high risk" segments.
Mr Byres said lending on interest-only terms represented nearly 40 per cent of residential mortgage lending – a share that is quite high by international and historical standards.
"APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile," he said.
He said individual banks would be slapped with new requirements if they go over the new limits.
Housing investor lending bounces back
Treasurer Scott Morrison urged financial regulators last week to crack down harder on loans to real estate investors, saying it was no longer just a question of housing affordability, but "frankly, also an issue about household debt...and the need to make sure that is well-managed from a financial stability point of view".
Shortly after the speech, three of the four major banks raised interest rates on interest-only and investor loans.
Home prices in Australia's biggest cities have jumped 3.7 per cent since the start of the year with the proportion of settled auctions on the rise as well.
Sydney house prices have jumped 5.3 per cent since January 1, according to the latest data from CoreLogic.
The median house price in Sydney is now $950,000, while the median unit price hit $740,000. Melbourne's median house price is $710,000 and the unit price at $525,000.
Interest-only loans are when a borrower's repayments only cover the interest on the amount borrowed, for an agreed period.
They are considered riskier than principal and interest loans because once the interest-only period ends, borrowers have to pay both interest and principal in less time. It also results in borrowers paying more interest over the life of the loan.
Mr Byres said APRA would continue to observe conditions in the residential mortgage lending market and may adjust the above measures should circumstances warrant it.
The Sydney Morning Herald
