IO caps still being ‘nutted out’, says CEO

Australian lenders remain uncertain about APRA’s interest-only crackdown and are awaiting further clarification on what the regulator is looking to achieve, according to the head of a major brokerage.

During a media conference in Sydney last month, Mortgage Choice chief executive John Flavell explained how lenders are managing their regulatory caps on investor and interest-only mortgages.

“There are still some elements in terms of what is and isn’t included in interest-only lending that are yet to be nutted out,” Mr Flavell explained, stressing that “APRA will get its cap”.

“The direct feedback we have received from our lender partners is that most of them have built a buffer and are taking a more conservative approach because there are still some elements to be defined around what is IO and what’s not.”

Interest-only loans are currently used by both investors and owner-occupiers. Mr Flavell explained that APRA, in particular, is interested in reducing the level of investor activity in the market. However, he said that by having lenders reduce their level of interest-only lending altogether, they are also negatively impacting some owner-occupiers who are taking out interest-only loans for a valid reason.

The Mortgage Choice CEO clarified that what the lenders are wanting to know is if APRA is looking to reduce activities of "riskier" borrowing across owner-occupier and investor, or if they are just looking to reduce investor activity.

“The feedback I have had from most of our lender partners is that they have adjusted their settings so that they have got quite a margin between reaching their cap in terms of the 30 per cent flow,” the CEO said.

Mr Flavell added that he expects the magnitude and frequency of lending changes to wind down.

“Maybe the pendulum has swung past centre and it might come back a little bit. The delta we are seeing on a pricing perspective on IO lending is about 80 points.”

In addition to pricing movements, some of the policy changes announced by lenders have included LVR caps of 75 per cent or 80 per cent.

“My feeling is, there is room to probably wind some of that back a bit, and I wouldn’t expect either the delta on interest rates or on policy to get any wider,” Mr Flavell said.

[Related: APRA limits 'extraordinarily successful']

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