The Australian Prudential Regulation Authority (APRA) has revealed that it will eliminate its benchmark on interest-only residential mortgage lending by authorised deposit-taking institutions (ADIs).
The benchmark was implemented as a temporary procedure in March 2017 to reinforce “sound residential mortgage lending practices in an environment of heightened risks”.
According to APRA, the introduction of this benchmark has caused a significant decrease in the percentage of new interest-only financing which is now below the 30% threshold.
APRA stated earlier in 2018 that it would remove the supervisory benchmark on investor loan growth subject to ADIs offering certain guarantees regarding the strength of their lending standards. Many ADIs have actually now provided those guarantees.
ADIs that are no longer subject to the investor loan growth benchmark will likewise no longer go through the benchmark on interest-only lending from 1 January 2019. As for other ADIs, it will be abolished simultaneously with the elimination of the investor loan growth benchmark.
APRA chairman Wayne Byres added, “APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary. Both have now served their purpose of moderating higher-risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years.”
However, in a letter to ADIs, APRA stated, “In APRA’s view, interest-only mortgages, and in particular owner-occupied interest-only lending, remain a higher risk form of lending.
“As a result, APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending. These internal limits should cover both the level of new interest-only lending and the type, including lending on an interest-only basis to owner-occupiers and lending on an interest-only basis at high LVRs.”
APRA noted that interest-only periods, particularly for owner-occupiers, should be of limited duration. In addition, serviceability assessments should test a borrower’s capacity to repay the principal and interest over the actual repayment period leaving out the interest-only term.
APRA stated that they plan to conduct a review of ADI risk controls on interest-only lending this year “as part of a broader assessment of improvements that have been made in lending standards.” The regulator will likewise work to “monitor closely” the conditions in the housing market more generally.
APRA adds, “As with investor loan growth, a re-acceleration in interest-only lending at an industry-wide level would raise systemic concerns. In such a scenario, APRA would consider the need to apply industry-wide measures in response.”
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This article first appeared on The Adviser.