On 31 March 2017, APRA (the Australian Prudential Regulation Authority) announced new rules that would limit interest-only lending to 30 per cent of banks’ portfolios. The four major banks responded in June 2017 by hiking interest rates on interest-only loans, while reducing rates for customers making principal and interest repayments. As lenders continue to make out-of-cycle interest rate moves, it’s vital borrowers review their home loans more frequently.
Changes to interest rates
In an effort to meet the new interest-only lending rules, the four big Australian Banks – CBA, Westpac, NAB and ANZ – announced rate rises for customers with interest-only loans in June 2017.
Following a 30-basis point increase in interest-only loans from ANZ, a 35-basis point rise from National Australia Bank, and a 34-basis point rise from Westpac, Commonwealth Bank increased rates on interest-only loans by 30-basis points.
With the concern that interest-only lending could create economic risks if there is an economic slowdown, banks are taking a much tougher line on interest-only lending with some, like NAB, declining customers with high loan-to-income ratios for this type of lending.
Rate increases are set to continue as banks encourage borrowers to shift to principal and interest loans, while those customers already making principal and interest repayments will benefit from a slight decrease in rates.
Along with the 30 per cent limit on interest-only lending, banks must also limit growth in investor loans to 10 per cent a year
Mortgage stress on the rise
The Reserve Bank of Australia (RBA) in its Financial Stability Review released in April 2017, warned that about one third of Australians have built up little or no buffer to higher interest rates, or are less than one month ahead on repayments.
Interest-only lending in Australia makes up around 40 per cent of all extended loans, and is considered a much riskier option than lending to borrowers paying down principal and interest. Lenders with interest-only loans are not required to make principal payments for the first five years.
But this group of lenders are “probably the highest stressed group in the market”, according to Steve Mickenbecker, Financial Services Executive at rate comparison group, Canstar. Canstar found during the month of May 2017, that the average rate on interest-only loans increased by 29-base points and standard variable rates by 16-basis points. Since the RBA’s last rate cut in August 2016, investors with interest-only loans face an average 74-basis point rise.
A good time to review
On the upside, most of Australia’s lenders are hungry for owner-occupier, principal and interest borrowers and will negotiate rates to attract this type of customer. If you haven’t already reviewed your home loan interest rate recently, now is a good time to get in touch with a Mortgage Express broker to do that.
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