On Friday 31 March 2017, the Australian Prudential Regulation Authority (APRA) wrote to all Authorised Deposit-Taking Institutions (ADI’s) regarding new restrictions on interest-only home loans, which recognised the current heightened risk in the lending space. Since 2014, APRA has kept a close eye on the high level of interest-only loans being written by lenders. This has resulted in tightened regulations in order to leverage the household mortgage sector. These restrictions, follow an increase in interest-only rates from the banks over the last fortnight.

Currently, interest-only loans make up 40% of the market, which is considered “quite high by international and historical standards”. In order to overcome the surge of interest only loans, all lenders are expected to take immediate action with the intention to “reinforce sound residential mortgage lending practices”.

The tighter restrictions delivered by APRA recommends ADI’s limit the flow of new interest-only lending to 30 percent of new residential mortgage lending, and within that:

• Place strict internal limits on the volume of interest-only lending at loan-to-valuation ratios (LVRs) above 80 percent; and
• Ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 percent;
• Manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 percent growth;
• Review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and
• Continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans and loans for very long terms).”

What does this mean for you?

With the tighter regulations, lenders will adjust their lending practices for the purpose of aligning with APRA expectations. This means that it will become increasingly harder to get interest-only lending for loans above 80% LVR and strict justification will be required for loans above 90% LVR. However, while all lenders in Australia must abide by the same rules and regulations, each lender is different in relation to specific lending criteria.

For this reason, it is beneficial for borrowers to seek an experienced mortgage broker that understands the market, its changes and challenges. Each client has a unique situation, which is why it is essential to speak to someone to aid in the right fit for your circumstances.

If you want to know more, get in touch with us. We’re here to help provide you with the right answer.

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