APRA’s interest-only loan clamp axed to avoid crunch
The nation’s banking regulator has scrapped tough restrictions on banks writing interest-only mortgages.
The nation’s banking regulator has scrapped tough restrictions on banks writing interest-only mortgages as it attempts to avert a threat of a credit crunch and put a floor under falling house prices.
The regulator’s move comes against the backdrop of sharp declines in house prices of almost 10 per cent in Sydney and steep falls in Melbourne this past year.
The Australian Prudential Regulation Authority said yesterday its lending limit, which restricts interest-only loans to 30 per cent of new residential mortgages, would be scrapped from January 1.
The initial interest-only loan limits, imposed by APRA as the housing market was heating up early last year, spurred a wave of interest-rate hikes from the banks to deter borrowers from riskier interest-only loans.
In interest-only home loans, borrowers — often investors — pay just the interest for about five years before they start paying back the mortgage amount.
The latest APRA move comes after it axed a 10 per cent limit on bank lending to property investors in April.
Analysts expect the large banks will now review the rates on their interest-only mortgage products, but say the removal of the limits won’t spur a notable lift in lending volumes.
National Australia Bank chairman Ken Henry said yesterday the moves were a positive step for the housing market. “There’s no doubt house prices are going through a correction,’’ he said. “It looks to us to be an orderly correction. It might have further to run but we don’t see it as being destabilising in any way and we think there are continuing positive prospects for the housing industry.”
ANZ Bank’s chief executive Shayne Elliott did not directly address the APRA changes but told shareholders at the company’s Perth meeting after they were announced that he still expected to see “strong headwinds” in the year ahead.
“Borrowing capacity has reduced and investor lending across the country has stalled,” he said. “We don’t see these trends changing any time soon.”
A spokesperson for Westpac — which has the largest exposure to interest-only loans — said the bank welcomed the APRA changes: “The benchmarks provided an important mechanism at the time but we agree that they are no longer required. Westpac remains committed to having strong lending standards and meeting our responsible lending obligations.”
Banking analysts don’t see APRA’s scrapping of the caps as much of a positive, particularly given how much interest-only lending has stalled.
Brian Johnson, from investment group CLSA, said: “At the edges, this is better for the housing market generally and Westpac Bank in particular, given Westpac has circa 40 per cent of its book in interest-only versus ANZ’s 22 per cent, CBA’s 30 per cent and NAB’s 24.5 per cent.
“However, the reality is that every bank’s interest-only housing lending is well below the 30 per cent cap, given banks repriced up interest-only rates.
“APRA removing this 30 per cent interest-only flow cap is likely more a reflection of how worried they are re (the) fragility of the housing market and systemic risk posed.”
Josh Frydenberg backed APRA’s statements that the lending caps had served their purpose. “Given the reduction in interest-only lending and the general strengthening of lending standards by banks, APRA has determined that the removal of these industry-wide benchmarks is appropriate,” the Treasurer said.
Labor’s Treasury spokesman, Chris Bowen, said he would seek briefings from APRA and the Reserve Bank of Australia to explain the about-turn.
“Josh Frydenberg needs to explain today whether or not he has expressed a view to APRA or the Council of Financial Regulators over whether APRA should end its interest-only loan restrictions,” he said.
The Australian Competition & Consumer Commission said last week the interest-only limits had resulted in banks lifting rates in “synchronised pricing behaviour”. Sources said that to comply with APRA’s rules, the banks felt pressured to follow their peers in pricing, or they would have seen greater applications for interest-only loans.
Morgan Stanley analyst Richard Wiles said APRA’s caps on investor loans had “fundamentally altered” banks’ approach to mortgage lending and had contributed to the end of a housing “bull market”.
“We don’t expect the removal of these restrictions to drive a rebound in the majors’ housing loan growth because the removal of the 10 per cent growth cap for investor loans in April 2018 has not driven higher growth in that category of lending,” he said.
“Interest-only loans are only about 17 per cent of new loans, which suggests that the 30 per cent limit is not the primary constraint... we think this shows APRA is aware of the potential impact of credit rationing and is now trying to mitigate the risks that are emerging in the housing market.”
Additional reporting: Richard Gluyas
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