In March 2017, the Australian Prudential Regulation Authority (APRA) limited the amount of interest-only mortgages that lenders could issue to 30% of new home loans.
Today the regulator announced it will start to remove this restriction from January 1, 2019.
“The introduction of the benchmark has led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30% threshold,” APRA said in a statement.
This comes as the nation’s two biggest property markets are caught in a downturn with the latest CoreLogic figures showing Sydney home values dropped 8.2% in the year to December 16, while Melbourne’s slid 6.5%.
APRA Chairman Wayne Byres said the lending restrictions were always intended to be a temporary measure designed to reduce the number of interest-only mortgages in the market.
“Both have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years,” Mr Byres said.
Earlier this year, the regulator announced it would remove its 10% cap on investor home loan growth that was introduced in 2014 to cool the hot Sydney and Melbourne property markets.
Lenders which provided certain assurances around the strength of their lending standards, which is now most banks, were exempt from the investor loan cap.
Those lenders will no longer be subject to the interest-only home loan restriction next month with others set to follow once APRA is satisfied with their lending standards.
Canstar’s Group Executive of Financial Services Steve Mickenbecker said APRA has instructed lenders to have robust home loan application processes, which could mean we are unlikely to see a big uptick in interest-only loans once the restriction is removed.
“There is no strong case for owner occupiers to take interest-only, if they can afford principal reductions,” Mr Mickenbecker said.
“So, it is unlikely that we will see owner occupiers returning to the market just from this move. It does, however give lenders some flexibility.”
He said the interest-only loans for investors were not always influenced by affordability, but were also about preservation of capital and taxation deductions.
“The added capacity of lenders to make interest-only loans may bring some investors back into the market, especially if lenders cut the added margin for interest-only.”
The Housing Industry Association (HIA) said APRA’s decision could help ease the current “credit squeeze” where lenders are lending less, which means there’s less buyers in the market.
“Over the past 12 months, ordinary home buyers have experienced significant constraints in accessing the appropriate level of finance to buy a home,” HIA Principal Economist Tim Reardon said.
However, Mr Reardon said the banks’ own tighter lending practices, which he said has gone above and beyond the regulator’s requirements, was putting more pressure on the housing market.