APRA calls time out on the interest only cap in a bid to breathe life back into home lending

APRA calls time out on the interest only cap in a bid to breathe life back into home lending

APRA’s announcement today that it will remove its temporary benchmark on interest-only lending from 1 January 2019 is a bid to steady the home loan market, says comparison site RateCity.com.au.

The announcement comes a week after APRA’s latest Quarterly ADI Property Exposures statistics showed interest-only loans had fallen to 16.2 per cent of new lending for all authorised deposit-taking institutions (ADIs).

This is down from the record high reached in June 2015 when 45.7 per cent of new loans written were interest-only.

While APRA’s interest-only cap of 30 per cent was only for new lending, the banks entire loan books are now under this mark, at 27 per cent for all ADIs.

Sally Tindall, research director at RateCity.com.au, said today’s announcement is good news for investors.

“APRA’s intervention has had a marked effect on new borrowing and banks have proven that they can remain well under the cap,” she said.

“This announcement today will see banks re-open their books to more interest-only lenders, particularly investors.

“Whether they drop their interest-only rates to attract more borrowers on to their books, will be interesting.

“Banks have grown accustomed to charging borrowers more for interest-only loans. The final ACCC report into residential mortgage pricing released last week found that the big four banks collected an extra $1.1 billion over the last financial year as a result of hiking interest-only rates,” she said.

RateCity.com.au data shows that three years ago the average gap between owner occupiers paying principal and interest and investors paying interest-only was 0.20 percent. Today it is 0.57 per cent.

“With increasing anxiety over the domestic housing market, the government will be hoping this decision will help curb the falls in home lending and steady the Sydney and Melbourne housing markets.

“Investors currently on interest-only terms who were looking down the barrel of having to switch to principal and interest repayments will be hoping this gives them a reprieve as well,” she said.

APRA also noted that “for ADI’s that have provided the necessary assurances on their lending standards and are no longer subject to the investor loan growth benchmark, the interest-only benchmark will also no longer apply.” 

Average rates according to borrowing type

Owner occupier, principal and interest

4.27%

Owner occupier, interest-only

4.68%

Investor, principal and interest

4.60%

Investor, interest-only

4.84%

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Learn more about home loans

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.