Interest-only loan value drops for first time since GFC

For lease and for sale signs proliferate outside an apartment block in the western Sydney suburb of Westmead

Figures released by the Australian Prudential Regulation Authority (APRA) show the aggregate value of interest-only loans fell by $2.3 billion in the June quarter.

The last time the aggregate stock of the loans generally used by investors to negatively gear property fell was in 2009, as credit markets tightened and risk was abandoned.

APRA, no doubt, would also have been pleased to see the flow of interest-only loans had slowed considerably as well, falling from 36 per cent of all loans written in the first quarter to 30 per cent in the second.

Interest-only were specifically targeted by APRA earlier this year in a bid to “de-risk” lenders’ property dominated balance sheets.

In March, APRA demanded the banks limit interest-only loans be limited to 30 per cent of new mortgages, down from the previous limit of 40 per cent.

That prompted banks to unleash a series of out-of-cycle rate rises aimed at the investor sector, making interest-only loans around 60 basis points more expensive than the standard principal-and-interest loan.

The regulator also told the banks to tighten lending criteria, with risky loans requiring a maximum loan-to-value ratio (LVR) of 80 per cent, or in other words a 20 per cent deposit.

The limits were in effect the second stage of APRA’s so-called macro-prudential tightening having enforced a 10 per cent ceiling on annual investor credit growth in 2014.

JP Morgan’s Tom Kennedy said the data was confirmation APRA’s measures were having an effect.

“Banks are becoming more selective in their loan criteria, particularly in regard to high-LVR lending,” Mr Kennedy said.

“The share of loans with an LVR great than 90 per cent has fallen further … while the share of lending to borrowers with deposits of more than 20 per cent continues to increase.”

However, Mr Kennedy said further tightening was not out of the question given the size of the banks’ mortgage books and the time it would take to unwind the very large share of interest-only loans.

A graphic showing the aggregate of interest-only loans in Australia