APRA scraps cap on interest-only lending

The Australian Prudential Regulation Authority (APRA) has announced it will ease the restrictions it put in place on interest-only residential mortgage lending.

The banking regulator capped the proportion of interest-only lending at 30 per cent back in March 2017 in a bid to curb high risk lending practices.

With banks having reached their benchmarks and having provided assurances to APRA, it seems that there is no longer a need to have the benchmark in place.

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

The cap will be removed from January 1 2019 for banks that are no longer subject to APRA’s benchmarks for investor lending. For other banks, the cap will be removed concurrently with the removal of the investor loan growth benchmark.

“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.”

What you need to know about interest-only lending

While it may be easier to take out an interest-only home loan in the New Year, it’s still worth carefully assessing the pros and cons of these types of loans.

The major benefit of interest-only loans is that they free up cash that can be saved or invested elsewhere, however borrowers still need to pay the principal of the loan at some point.

With interest rates being at such low levels at the moment it provides a great opportunity to pay down loans quickly (which may not be as easy if interest rates go up), which means borrowers end up paying less interest overall. So if you can pay down the principal of your loan in the current environment then it is generally advisable to do so.

Everybody’s situation is different though so if you’re after advice, have a chat to Professionals Finance.

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