Loan restrictions in place until household debt stabilises

Earlier this year, the Australian Prudential Regulation Authority (APRA) placed restrictions on investor lending and interest-only loans to address housing affordability, and potential mortgage stress. At the time, interest-only loans accounted for almost 40 per cent of lending.

APRA Chairman Wayne Byres recently told building societies and credit unions that restrictions will remain in place until household debt stabilises.

“For those of you who chafe at the constraint,” Byres told lenders, “their removal will require us to be comfortable that the industry’s serviceability standards have been sufficiently improved and – crucially – will be sustained.”

Byres says that APRA wants to see borrower debt-to-income levels constrained, so borrowers are in a better position if interest rates rise in the future.

Why restrict lending?

APRA were concerned that too many households were paying only interest and not reducing their mortgages over time.

The worry was that households, and the overall financial system, would be negatively affected if there is an economic downturn, or interest rates go up.

Also, unsustainable investor lending has contributed to rapid growth in house prices. By restricting investor lending, APRA hopes to limit market growth in excess of 10 per cent each year.

What are the restrictions?

APRA’s restrictions mean investment loans can make up only 10 per cent of the lender’s loans, while interest-only property is restricted to 30 per cent of new residential loans.

Interest-only loans tend to have higher interest rates and can be 0.3 to 0.5 per cent more than principal-and-interest loans. Interest-only borrowing rules have also tightened, which means it’s harder now to get an interest-only loan.

How effective are the restrictions?

Five months after implementation, the restrictions are working, according to APRA, and won’t be lifted until household debt stabilises.

Since APRA’s restrictions were put in place, interest-only lending has dropped from 40 to 15 per cent of all new mortgages.

APRA cannot directly influence house prices, but there is a suggestion that property price growth has slowed since APRA’s changes. CoreLogic also found that first home buyers are increasing their presence in the market since APRA’s changes and government stamp duty incentives were introduced.

What APRA’s restrictions mean for you

The investor lending reins have tightened, but that does not mean investor lending is impossible. Talk to your Mortgage Choice broker about opportunities for investors.

The restrictions mean both owner-occupier buyers and investor buyers need to make sure they are eligible for the loan, and are in a position to make repayments. Your Mortgage Choice broker will guide you through the process, to make sure you have all the supporting documents you need, and to help find the right loan for you.