Rebound in IO lending ‘doubtful’ despite cap removal

Speaking to Mortgage Business, AMP senior economist Shane Oliver has dismissed suggestions of a resurgence in interest-only lending, following the Australian Prudential Regulation Authority’s (APRA) announcement that its 30 per cent cap on interest-only loan growth will be scrapped as of 1 January.

 The benchmark was put in place as a temporary measure in March 2017, as part of a range of actions over recent years to “reinforce sound lending practices”.

APRA has noted that the introduction of the benchmark has led to a “marked reduction” in the proportion of new interest-only lending, which it said is now “significantly below” the 30 per cent threshold.

Mr Oliver told Mortgage Business that with recent data showing that both the flow of new loans and the total stock of loans are running below the 30 per cent cap, APRA would have concluded that its cap has “served its purpose and passed its used-by-date”. 

“The cap is 30 per cent and the flow [of new loans] was running at around 16 per cent, so we’re effectively running at half of the cap,” the economist said.

“The total share as the stock of total loans has fallen from around 40 per cent to now around 27 per cent, because people have switched from interest-only to principal and interest.”

Mr Oliver added: “I guess, APRA has concluded that [the cap] is no longer that relevant.”

The AMP economist also observed that the regulator’s decision was part of its move to encourage “qualitative” lending as opposed to broader lending curbs.

“I think what APRA wanted to do was get the banks to move towards a greater qualitative approach, rather than artificial speed limits,” Mr Oliver continued.

When asked if he believes the scrapping of the IO benchmark would trigger a rebound in banks’ appetite for such loans, Mr Oliver said that with most lenders already “well below” the 30 per cent cap, the latest announcement would not serve as an opportunity for a resurgence in interest-only lending.

“Removing the cap doesn’t mean interest-only lending is going to take off again, because banks are already well below the cap.” 

Mr Oliver added: “If the banks wanted to increase the flow of interest-only lending, they could have doubled it from recent levels.

“The cap hasn’t actually been a barrier to interest-only lending, and I’d be doubtful that it would lead to an increase in interest-only lending because banks have become a lot more cautious.

“With property prices falling the way they have been, I think that they’d be reluctant to come back in with more interest-only loans again.”

However, also reacting to APRA’s announcement, RateCity research editor Sally Tindall said she believes that with the 10 per cent cap on investors lending also lifted, APRA’s latest move is “good news for investors”.

Ms Tindall claimed that the removal of the curb would lead to a rise in interest-only lending.  

“APRA’s intervention has had a marked effect on new borrowing, and banks have proven that they can remain well under the cap,” she said.

“This announcement will see banks reopen their books to more interest-only lenders, particularly investors.”

However, Ms Tindall questioned whether the banks would reduce interest-only rates to spark a rise in demand from borrowers, citing the final report of the Australian Competition and Consumer Commission’s (ACCC) mortgage pricing review, which found that the major banks were engaging in “synchronised” pricing behaviour to generate revenue following APRA’s introduction of the interest-only benchmarked.

“Banks have grown accustomed to charging borrowers more for interest-only loans,” she said. “The final ACCC report into residential mortgage pricing released last week found that the big four banks collected an extra $1.1 billion over the last financial year as a result of hiking interest-only rates.”

The RateCity research editor also said that the government “will be hoping” that APRA’s announcement would “curb the falls in home lending and steady the Sydney and Melbourne housing markets”.

Ms Tindall concluded: “Investors currently on interest-only terms who were looking down the barrel of having to switch to principal and interest repayments will be hoping this gives them a reprieve as well.”

The Property Council of Australia also reacted to APRA’s announcement, welcoming what it described as a “sensible step” that “supports the strength and stability” of the financial system.  

Property Council of Australia CEO Ken Morrison said: “As APRA has noted, it was introduced as a temporary measure in March 2017 to moderate higher risk lending and support a strengthening of lending standards.

“The availability of finance is vital to the sustainability and growth of our property sector, which employs 1.4 million Australians and contributes 13 per cent of our GDP.

“At a time when some of our largest residential property markets are cooling, APRA’s announcement provides welcome certainty and direction.”

Further, Australian Banking Association CEO Anna Bligh claimed that APRA’s decision is proof that banks are lending prudently.

“APRA’s announcement shows that banks have adjusted lending to respond to concerns around an oversupply of interest-only loans, illustrating a prudential system where both banks and regulators can quickly and effectively respond to a changing environment,” Ms Bligh said.

“While banks will continue to lend prudently, [APRA’s] decision will mean all banks can offer more choice for customers who are looking to buy a house or apartment.

Ms Bligh concluded: “Increased competition across the industry will mean customers have more ability to shop around for the best deal for them when looking at an interest-only home loan.”

[Related: APRA scraps interest-only cap]