The Australian Prudential Regulation Authority (APRA) has been focusing their sights on residential mortgage lending guidelines since 2014 and most recently placed interest only residential home loans under the spotlight.
On the 31st March APRA announced that it had set down the following guidelines to authorised deposit-taking institutions (ADIs)
- limit the flow of new interest only lending to 30% of total new residential mortgage lending, and with that:
- place strict internal limits on the volume of interest only lending at loan-to-value ratios (LVRs) above 80%; and
- ensure there is strong scrutiny and justification of any instances of interest only lending at an LVR above 90%;
- manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10% growth;
- review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and
- continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, loans for very long terms)
Interest only loans currently represent nearly 40% of the stock of residential mortgage lending by ADIs – a share APRA consider as quite high by international and historical standards. Failure by an ADI to comply with this 30% limit may result in APRA imposing additional requirements on that ADI.
It doesn’t end here, APRA has confirmed that it continues to focus on serviceability assessment and the methodology ADIs are using.