Investors note: Interest only loans harder to get!

If you are a thinking of buying a home or if you are an investor, looking for an interest only loan will become much harder now due to the Australian Prudential Regulation Authority (APRA) becoming stricter on lending practices, particularly on interest only and investor loans.

Interest only loans are when the repayment for the loan only consists of the interest on the amount borrowed for an agreed period, APRA considers this risky because once the interest only period ends and the borrower has to pay both interest and principal, it creates additional vulnerability due to the increase in the repayment amount and the borrower essentially having to pay more interest over the life of the loan.

There will also be a stricter lending practice for borrowers who want loans with a high Loan to Value Ratio (LVR), these are loans which are very close to the value of the property. APRA will also keep an eye out on banks to make sure they keep their growth below the 10% benchmark.

The new measuresare aimed to ensure that lenders understand and recognize the heightened risk in the housing market and to ensure that their lending standards and practices are up to speed to respond to these conditions.

APRA has declared that the new rule will limit the flow of new interest only lending to a limit of 30% of the total new residential mortgage lending. This means banks can lend only up to 30 percent of its total residential lending capacity for interest only loans. Currently, all four major banks are above the specified limit which will mean that no new interest only lending will be allowed for the time being.

Servicing criteria of each bank will need to be set at an appropriate level which in turn should verify the capability of the borrower’s mortgage repayment capacity.

As per the APRA chairman, new rules will be imposed on banks if they violate the set limit of 30 percent lending for interest only lending. The result of new rules was seen within no time after the speech;three of the major banks raised the interest rates for interest only loans.

If you have any loan related enquiries or if you are thinking of buying a property in the near future, feel free to contact us on 03 8609 1889 and one of our friendly consultants will be able to do a quick serviceability based on your current financial situation.