‘Two loans’ needed under new home lending policy

Customers of an Australian mutual bank will have to take out two loans to cover their mortgage if they want to make interest-only repayments, following changes brought in this week.

Teachers Mutual Bank announced this week that it was making changes to its lending policy for loans with interest-only (IO) repayments across both fixed and variable rate products, applicable to both owner occupiers and investors.

The changes will take effect across all brands, including UniBank and Firefighters Mutual Bank.

As of Tuesday (30 May), borrowers will be limited to paying IO on just 50 per cent of their borrowings, while the principal and interest (P&I) proportion of their loan must cover at least half of their borrowings.

The bank emphasised that this means a borrower would need to take out two loans to cover their mortgage.

“Where the applicant has total borrowings of $300,000, the minimum P&I component is $150,000. Hence the applicant would have two loans, a minimum of $150,000 on P&I and maximum of $150,000 on IO,” it said.

Further, borrowers will not be able to take out cash on any loan where part of the total borrowing has an IO component.

Applicants who have been conditionally approved for a home loan but have not yet settled will not be affected. However, the bank has warned that if an application exceeds its 90-day approval and requires reassessment, the new policy will apply.

The changes have been brought in to ensure that the bank does not surpass the 30 per cent speed limit brought in by APRA (The Australian Prudential and Regulatory Authority) earlier this year.

The bank commented: “APRA has recently required that all financial institutions limit their interest-only home loan lending growth to 30 per cent of total new residential mortgage lending.

“To manage our interest-only lending growth in line with the regulator’s expectations, the bank will be making a number of changes to our interest rates and lending policy.”

As well as changing lending policy, the bank has also hiked its interest rates on IO loans.

Teachers Mutual Bank has raised rates by 40 basis points for 1- to 5-year terms across both owner-occupier and investor IO loans. The changes are also effective across UniBank and Firefighters Mutual Bank.

For example, rates for owner-occupier IO loans now start from 4.34 per cent (5.22 per cent comparison) running to 5.01 per cent for 5-year loans (5.21 per cent).

As for investor loans, rates for 1- to 5-year terms have risen to between 4.64 per cent (5.25 per cent comparison) and 5.31 per cent (5.33 per cent comparison).

Many banks have announced interest changes and policy changes in recent weeks, as lenders look to cool the amount of IO, and investor loans.

The latest figures from APRA show a year-on-year slowdown in investment and interest-only mortgages, property research analysts CoreLogic have warned that banks have “a lot more work to do” to curb their IO lending.

 [Related: Bank raises rates, sets sights on brokers]

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Annie Kane

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