One of the nation’s biggest mutual lenders has cut interest-only loans in half and lifted interest rates by 40 basis points, heralding a tough new phase in attempts to cut back on risky borrowing.
It means borrowers will have to take out two loans for a single property – a minimum principal and interest loan and a maximum interest-only.
Teachers Mutual Bank, which includes UniBank and Firefighters Mutual Bank, is requiring a minimum of 50 per cent principal and interest for all home loans, which means the maximum interest-only is also 50 per cent.
A new borrower seeking $300,000 will have two loans – a minimum of $150,000 on principal and interest and a maximum of $150,000 on interest-only.
In addition, borrowers cannot draw down any cash from any loan where part of the total borrowing is interest-only and scrutiny of ability to pay has been toughened.
It comes as latest Australian Prudential Regulation Authority numbers reveal that interest-only loans still account for more than 36 per cent of total home loans by value in the March quarter, down from 37.5 per cent previously.
APRA issued an order at the end of March requiring banks to cut interest-only loans to 30 per cent of new residential lending.
Since then most lenders have increased minimum deposits to at least 20 per cent, raised interest rates, toughened scrutiny of borrowers’ ability to pay and banned overseas’ lenders.
Teachers Mutual first slammed the brakes on property investment 12 months ago when it temporarily withdrew from new investment lending to reduce annual growth from about 15 per cent. It also increased minimum deposits to 20 per cent. The bank has more than 186,000 members and more than $6 billion in assets.
“APRA has recently required that all financial institutions limit their interest-only lending growth,” a bank spokesman said about the latest changes.
“To manage our interest-only lending growth in line with the regulator’s expectations, the bank will be making a number of changes.”
The latest tightening is also likely intended to strengthen the quality of new loan applicants, which makes the balance sheet more resilient if there is a property downturn.
The bank’s new round of rate increases also mean interest-only loan rates are higher than principal and interest for all owner and occupier and investor loans for all fixed rates from one to five years.
The Reserve Bank of Australia and other regulators are concerned that interest-only loans, which defer principal payment, are fuelling strong demand in the nation’s property hotspots, lowering affordability, increasing household debt and vulnerability to financial distress.