APRA tightens rules for interest-only home loans

APRA has clamped down further on banks’ runaway growth in riskier loans and lending to property investors.

Tough new rules by APRA will limit higher-risk, interest-only lending. Picture: Hollie Adams

The prudential regulator has confirmed fears of rising instability in the financial system, clamping down further on the banking sector’s runaway growth in riskier loans and lending to property investors as it turns the screws on the shadow banking sector for the first time.

The tough new rules announced by the Australian Prudential Regulation Authority yesterday — which will limit higher-risk, interest-only lending to 30 per cent of all new residential mortgages and require strict controls on interest-only loans with deposits smaller than 20 per cent — are likely to pile pressure on the government to tackle generous tax breaks for property investors ahead of the May federal budget.

It marks the latest escalation of a sector-wide clampdown on loose underwriting standards, excessive investor lending and property speculation, as the banking industry and regulators attempt to curb spiralling house prices and exploding household debt that threaten the stability of the $1.6 trillion housing system.

APRA chairman Wayne Byres said the huge share of interest-only mortgages in the market was “indicative of a higher risk profile” and laid out the rules to “ensure lenders are recognising the heightened risk in the lending environment”. Banks will also need to justify any interest-only investment loans with a deposit smaller than 10 per cent.

For the first time the regulator will also target the shadow lending non-bank sector, investigating the major banks’ so-called warehouse facilities, which provide bridging finance to unregulated lenders seeking to roll up home loans into residential mortgage bonds.

Fresh figures from the Reserve Bank showed housing lending increased 0.6 per cent in February — faster than the 0.4 per cent rate revealed in yesterday’s separate APRA figures, suggesting a third of housing lending was now flowing to the unregulated non-bank sector.

Mr Byres also doubled down on the regulator’s 10 per cent annual “speed limit” on banks’ investor loan growth, which was introduced in 2014 in a bid to cool surging capital city house prices, urging lenders to remain “comfortably” below the limit.

While the rule initially sparked a drop in investor loan growth, from a peak of 10.8 per cent in May 2015 to 4.6 per cent by August last year, lending to property investors recently reignited. The latest official data, released ­yesterday, showed lending to property investors in February was up 6.7 year on year — the fastest pace in 12 months. Owner-­occupier loans, meanwhile, grew at the slowest pace for 17 months.

CoreLogic data this week showed house prices in Sydney have surged 19 per cent over the year, and by 16 per cent in Melbourne. Since 2009, prices are up more than 86 per cent in Melbourne and have more than doubled in Sydney. Household debt to income has risen to more than 180 per cent — one of the highest levels in the world.

“We’re in a bubble, there’s no point denying it,” David Murray, the head of the financial system ­inquiry and former CBA chief executive, said. “With prudential standards, when you try to temper the supply of finance for housing only to see it pushing up in the non-bank sector, you’ve got a problem. It means people believe these prices are going to go up — no matter what. And the more we lend and the more we buy, the more prices will go up.

“It’s a bubble.”

As the major banks increase interest rates and tighten criteria for borrowers, investors have been forced to seek out smaller banks offering lower interest rates and have flooded the non-bank sector, which sits outside the scope of APRA’s regulatory framework.

The sharp rise in interest-only loans has raised regulators’ concerns. Interest-only loans, where the principal is not paid down for about five years, recently jumped above 40 per cent of all loans written for the first time in a year.

Scott Morrison, who is under pressure, including from the Reserve Bank, to curtail property investor tax breaks such as negative gearing and capital gains tax in this year’s federal budget, said APRA’s new rules were “carefully calibrated and proportionate” and showed “regulators are alive to risks around housing market”.

The Treasurer has in recent weeks raised concerns about the effectiveness of the 10 per cent limit and the rise of interest-only loans. He said the regulator’s “measures will help to provide stability to the housing market by reducing higher-risk activity”.

Opposition Treasury spokesman Chris Bowen said the government was “completely asleep at the wheel” when it came to financial stability and housing affordability. “It continues to sit on its hands as ballooning leverage increasingly undermines our financial stability, making Australia more vulnerable in the event of a global downturn,” Mr Bowen said.

While the banking sector recently pushed through a round of interest rate rises for owner-occupiers and investors, out of cycle with the RBA, analysts have raised concerns that higher rates could add stress to debt-laden borrowers, prompting forced selling of investment properties.

“It puts additional pressure on the already highly leveraged household sector,” Macquarie analyst Victor German said. “This, coupled with a rising global rates outlook, suggests the risk around the investor portfolio appears to be increasing.”

Bell Potter analyst TS Lim said the limited scope of APRA’s new rules meant harsher measures could be in the pipeline.

An ANZ spokesman said the bank welcomed the new measures.