Property investors win as banking regulator loosens interest-only rules

Killian Plastow
Dec 19, 2018, updated Dec 19, 2018

Prudential regulator APRA will wind back its restrictions on interest-only residential lending. Photo: Getty

Property investors have been given a pre-Christmas gift with the banking regulator set to roll back restrictions on “higher-risk” interest-only mortgages.

APRA announced on Wednesday that it would dump its tough requirements on interest-only loans from January 1.

Chairman Wayne Byres said the tight restrictions on interest-only mortgages (which are popular with property investors) had been a success. Numbers of new interest-only loans had halved since the policy was introduced in March 2017.

Sally Tindall, research director at financial comparison website RateCity said investors would welcome the move.

“APRA’s intervention has had a marked effect on new borrowing,” she said.

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

Investors use interest-only mortgages to buy properties that can be sold a few years later – allowing the investor to keep any capital gains without having to pay down the loan principal.

However, they commonly revert to principal-and-interest after five-year terms, which means higher payments for borrowers. In September, consumer comparison site Finder.com warned that 900,000 interest-only loans were due to convert to principal-and-interest in 2019 – they were a “ticking time bomb” for the economy, it said.

On Wednesday, the Property Council of Australia said APRA’s move would help stabilise the real estate market, parts of which have been battered by falling prices throughout 2018.

“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,” property council chief executive Ken Morrison said.

Building, renovation and development industry group HIA also welcomed the “important message” for stability in the property market.

However, HIA warned more was needed to alleviate the credit squeeze it said was putting pressure on would-be borrowers.

HIA said ordinary buyers had faced significant constraints on their ability to borrow in the past 12 months. Loan approvals for new homes had blown out from two weeks to two months – and many were being rejected.

“With the [banking] royal commission scheduled to release recommendations early next year, there is a risk that the credit squeeze may drag on into 2019,” HIA principal economist Tim Reardon said.

“The residential construction sector is already cooling. Policymakers will need to proceed cautiously when responding to the commission’s recommendations.”

APRA said it expected lenders to maintain appropriate risk limits after its regulations were lifted.