The Australian Prudential Regulation Authority (APRA) will soon remove its so-called interest only “speed limit” that saw banks put the brakes on interest only loan approvals.
We expect cheaper interest rates are just around the corner but is the right time to apply for an interest only loan?
APRA has removed the 30% cap
Since March 2017, the major banks and other authorised deposit-taking institutions (ADIs) have been required to cap interest only approvals to 30 per cent of their entire loan book.
The speed limit was part of a raft of requirements introduced by the industry regulator (APRA) ahead of the damning Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Satisfied that lenders have adequately reduced their loan book risk, APRA will remove the IO cap from 1 January 2019.
The latest news follows the removal of the 10% growth rate cap on investor lending back in July this year.
“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” APRA chairman Wayne Byres said.
“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.”
Is this good news for property investors?
We’re likely to see interest only rates dropping to match principle and interest (P&I) interest rates over the next few months.
However, the short-term will see banks continue to keep a relatively tight leash on interest only home loan approvals so lender choice is essential, Home Loan Experts managing director Otto Dargan said.
The reason is that APRA still requires ADIs to “maintain adequate oversight of the level and type of interest only lending”.
Borrowing power will continue to be heavily-reduced for interest only applications due, in part, to the crackdown on assessing living expenses.
We also believe that banks will continue to carry out stringent enquiries as to the purpose of the interest only term.
What we were seeing on a regular basis was borrowers unable to extend their interest only period when refinancing.
As a general rule, approvals for interest only home loan will be challenging while IO for investment will be more readily accepted as long as you’re in a good financial position.
For example, lenders will be weary about approving and extending an IO term for a borrower with black marks on their credit file or those with a poor repayment history.
Get in touch with one of our mortgage brokers
We can assess your situation in full and let you know where you stand in this changing lending environment.