Banks Forced to Clamp Down....
By now you may have heard some of the hype surrounding Interest Only loans, and the banks changing policy in regard to these types of loans. Outside of the banking industry, it may seem like the banks changing their minds or trying to make things more difficult for home owners and investors. The truth of the matter is however, that the banks of other lending institutions - such as credit unions, building societies and friendly unions – have been instructed by APRA (the federal government body that oversees the finance industry) to lower their Interest Only loans to under 30% of their lending business. At present, the industry average is 38%, with some financial institutions higher than others.
In a letter sent on 31/3/2017 to Financial Institutions who fell under the jurisdiction of APRA , banks were told to act immediately to enact the new guidelines. The recent measures regarding Interest Only loans have been in response to this letter.
Recent Changes by the Big Four
NAB – Maximum LVR for Construction loans to be 90% (construction loans are interest only during the construction period)
EFFECTIVE 10th June 2017
CBA - Decrease discounts offered to customers for both new Owner Occupied and new Investment loans that are Interest Only
- Maximum LVR for Owner Occupied new Interest Only loans down from 95% to 80%
- Maximum LVR for Investment Interest Only loans down from 90% to 80%
EFFECTIVE 10th June 2017
ANZ - Maximum LVR 80% for both Owner Occupied and Investment Interest Only loans
EFFECTIVE 29th May 2017
Westpac - Maximum LVR 90% capped (with LMI) for Owner Occupied. Both new loans and existing loan top ups.
EFFECTIVE 15th May 2017
Some others have increased rates considerably, and slashed LVR for investors loans as low as 50%!
Why Does It Matter How Many Interest Only Loans The Banks Hold?
The Australian Banking and Finance industry has always been highly regulated, and is one of the reasons that we have such a stable banking and finance sector.
People may ask however “Why do APRA care is I want to pay Interest Only on my home or investment loan?”
This is a fair question, and it is certainly a blanket approach on behalf of APRA. The main concern however, is that a high percentage of Interest Only loans held by the bank, especially at a high LVR, may indicate that banks are adopting unsafe lending practices, which may result in customers being negatively impacted and placed in financial difficulty should interest rates rise, or when the interest only payments convert to a Principal and Interest payment at the end of the Interest Only loan. This is referred to as “Payment Shock”.
Another concern is that if housing prices fall, interest only borrowers may find themselves owing more than their property is worth, having only made interest payments, therefore not reducing the actual size of the loan.
This could mean that at the end of a 5 year Interest Only term, if the property falls in value by a conservative 3% per annum, at the end of the interest only term, you end up owing more than the property is worth.
Fluctuations in the market do happen. So the new measures being taken by APRA are there to protect consumers, and are not something to be worried about. The new guidelines to specify “new business” so in most instances will not affect loans already in place. Some banks will apply the new rules to those seeking increases to existing loans however.
As you know, it is our role to make sure that you have the most suitable loan for your situation. We are happy to discuss any concerns you may have in more detail. As always, please feel free to give me a call.
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Until next time,
Gus
0449 200 111
