A few weeks ago an announcement was made regarding the “Interest only Cap”. This was enforced some time ago by APRA (regulator of the banks) in an effort to stem the rise in interest only loans. The banks were restricted from setting up more than 30% of their loans as interest only.
So what was the announcement by APRA ? The announcement was that the cap on interest only loans was scrapped on the 1st January 2019.
What does that really mean to you?
Before answering that, let us distinguish between some loan types. The main push from APRA was to stop interest only loans on owner occupied property. The reality of this decision, whether you agree or not, was based on some sound principles of getting Australians to own their own homes sooner.
From a banking perspective it was and still is far easier to say that home loans (as opposed to investment loans) need to be principal an interest. There are some exceptions, such as building a new home.
The impact of the lenders all discouraging interest only home loans meant that the majority of them were below the cap of 30% interest only as that was only for their investor clients.
This meant that the APRA guidelines about limiting interest only for home loans will still be in place, but the restriction on 30% of new loans being interest only no longer applies. This is where investors are mainly concerned. However the reality is that very few lenders actually reached the interest only cap once they were only doing investor loans and so the removal of the cap will have very little impact.
Will bank policies loosen up?
There have been so many changes directed to lenders from APRA that changing one thing (the IO cap) may not have a significant impact on borrowing.
The actual investment cap has had very little to do with the inability of many people to obtain a loan. The APRA changes over the last few years have included :
- Scrutiny on living costs – and a much greater emphasis on using actual living costs and not some random minimum living costs table. This has impacted many people as the standard tables were well below actual living costs.
- A minimum rate for assessment of 7% +. For a number of years the lenders assessed new loans at a rate of approximately 2% above the actual rate. This is now effectively 2% of 7+% whichever is the higher. In addition, lenders that used to assess all other debts at actual repayment, are now assessing them at 7+%
These two have had more impact on borrowing capacity than the interest-only cap.
What is the good news?
There is some good news around. This is the reason you need to continually be in contact with your broker. At house & home loans we probably have more lenders available than any other broker in the country due to our unique arrangements.
- More lenders are doing interest only investment at 90% loan to valuation ratio
- Lenders have come out with competitive interest rates for sub 4.5% for interest only variable
- Fixed rates from 3.95% (2 year) for interest only investment loans are available.
- We still have lenders on our panel who are more generous (service better) and offer reasonable rates to investors