New interest-only loans drop in June quarter

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The latest figures from the Australian Prudential Regulation Authority (APRA) shows a marked drop in interest-only terms for new housing loans.

APRA’s June Quarterly Authorised Deposit-taking Property Exposures report indicates a 7% drop in interest-only terms for new lending from the previous quarter, in spite of a 10.6% rise in new lending in all categories since March.

The financial regulator’s latest data indicates that banks have responded to its demand to limit interest-only terms to 30% of all new lending, according to Sally Tindall, money editor at comparison website RateCity.

“Today’s data is clear: the banks have heard APRA’s message and have hit the brakes for new lenders looking to pay interest-only,” Tindall said. “Interest-only terms are now sitting at 30.5 per cent of all new lending which is just a fraction above APRA’s target. [However] the [Big Four] banks still have some work to do: collectively they’re sitting at 31.5 per cent.”

Existing customers appear to be hanging on to their interest-only terms, despite the increase in rates. APRA’s June report shows a moderate 0.4% drop in interest-only lending across the ADI loan books since the March quarter.

“RateCity data shows that investors on interest-only terms are on average paying 65 basis points more than owner-occupiers paying principal-and-interest,” Tindall said. “The APRA data also shows the banks are tightening the screws on borrowers with small deposits, with today’s results showing a slight dip for people with less than 10 per cent deposit.”

Should investors make the switch to P&I?
With the major lenders limiting new interest-only lending to investors and hiking interest rates on interest-only loans, should investors seek principal-and-interest loans, or is there another strategy they could pursue?

“The latest APRA figures suggest new investors are opting to pay principal-and-interest instead of higher rates,” Tindall said. “That said, not all investors are making the switch – people looking to maximise negative gearing are likely to stick it out with higher rates.”

“Either way, the best strategy for both sets of investors is to shop around for a lower cost loan. While investor rates under 4 per cent are a dying breed, there are still a handful to choose from, starting from as low as 3.74 per cent for someone paying principal and interest and 3.94% for investors paying interest-only.”

“That’s more than 200 basis points lower than the big banks’ standard variable investor rates, which translates to over $150,000 in savings over the life of the average loan.”


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Comments
  • Steve says on 11/09/2017 03:40:43 PM

    All this talk about property investors going to P & I loans show how the regulators just don't understand the real market place.
    The comment: Tindall said. “That said, not all investors are making the switch – people looking to maximise negative gearing are likely to stick it out with higher rates.” What a dumb statement and shows Tindal's lack of understanding of tax and cash flow.

    The majority of Property Investors are going interest only to minimise the out goings and increase their cash flow, while managing their tax deductions. The principal part of the repayment is not tax deductible and investors don't choose to pay higher rates to maximise negative gearing. P & I repayment are still much higher than interest only repayments, even at a higher interest rate. Why would you pay off a tax deductible debt while you have a non tax deductible debt, like a home loan. Any good accountant would advise to pay off the non tax deductible debt first.

  • Jetie says on 11/09/2017 05:45:05 PM

    As a retired bank manager and interest only investor, I agree wholeheartedly with your comments Steve.

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