Piquing APRA's Interest

The Australian Prudential Regulation Authority (APRA) has delivered another round of macro-prudential tightening to the Australian banking sector, particularly focused on reducing the proportion of approvals for interest-only lending down to a cap of 30% – levels last seen in 2008 – from current levels of 40%.

 

Managing interest-only loans is another de-facto tightening on investor lending, given that 50% of investor flow is in this product, versus the share of owner-occupied at 30%.

 

In our view, this will have a somewhat muted impact on overall volumes, but should improve quality of the loan book. Any re-pricing to control flows for this segment of the portfolio would clearly be enhancing to bank margins.

 

APRA’s new rules limit the flow of new interest-only lending to 30% of total new residential mortgage lending. Under that stricture, the new rules also require lenders to ensure the following measures are implemented:

 

  1. Strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80%;
  2. Ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90%;
  3. Manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10% growth;
  4. Review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and
  5. Continue to restrain lending growth in higher-risk segments of the portfolio, e.g. high loan-to-income loans, high LVR loans, and loans for very long terms.

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