PROPERTY

Interest rate reduction on Interest Only Loans – Likely

Bishwas Bhattarai, Senior Lending Manager
M. Comm. (Banking & Finance) UNSW, Dip. Fin. Plan.

28 August 2017

Following the mandate from APRA back in March interest only lending has been under scrutiny over few months. During, the last few months we have seen most of the lending institution have jumped in the band wagon and increased interest only rate especially with investment loans. In a bid to encourage the principle repayment.

The mandate to have the Interest only new lending growth not to exceed 30% of portfolio was introduced back in March. Alongside price hike, various prudential measures and lending criteria were introduced with a view to cool off “irresponsive lending”.

 

APRA mandates included

  • Limit the interest-only lending to 30% of total new residential mortgage lending
  • More robust lending criteria for borrowing over 80% Loan to Value ratio
  • Strong justification/ rational to provide interest only lending where the Loan to Value ration exceeds over 90%.
  • Investor lending not to exceed over 10% , to maintain as previously agreed
  • Further scrutiny on servicing, expenses , income and benchmark buffers set to strengthen lending criteria
  • To manage the high risk portfolio (especially with income and loan to value ratio) with further monitoring.

Recent, data shows this has worked much better than expected. As most of the new investment lending has been principle repayment. It suggests most major financial institutions overall new interest only lending now are under 28% of their new lending portfolio. Also, recent review suggests other metrics are also performing better. There is no doubt with the recent changes in the foreign investor lending has significantly contributed to this as well.

 

So in coming weeks or even days, we may expect the reduction on the rate of interest only lending. Currently, there are big parity in between the principle repayments and interest only lending as much as 80 basis points. Despite, the principle repayment loans being record low, interest only loans being around 5% are not uncommon.

It is very expected the Interest only loan for both Owner occupied and Investment loan for both variable and fixed rates may be dropped as much as 60 to 80 Basis points depending upon the institution.

This will be very much welcomed by investors who are already struggling along with the high interest only rates, in addition to the increased cost of living.