Over the last 12 months we saw the banks constantly and dramatically change their lending criteria for all types of lending.
The Australian Prudential Regulation Authority (APRA) has advised all lenders to tighten their criteria surrounding Interest-Only Loans on owner occupied and investor properties. According to APRA, the increased scrutiny is in response to an increase in heightened risks reflected in rising house prices, passive income growth and rising household expenses.
In addition, APRA has instructed banks that no more than 30% of new housing can be interest-only. ASIC intends to monitor this by increasing its surveillance of lenders and mortgage brokers to ensure the continuation of responsible lending.
2018 started with NO CHANGES to the lenders’ guidelines, although further tightening may be pending, given the rise of “living costs” for families. Slow wage growth and rises of essential services (electricity, fuel, gas, private health care and education) are placing additional pressure on family household budgets.
In the last quarter lenders adjusted their overall lending criteria with the “Serviceability or Assessment Guidelines”. Lenders now process all residential loans at an “Assessment rate” of 7.25%, irregardless of any discounts applied.
Whilst 2018 kicked off with lenders marketing their home loans at very attractive interest rates, it all comes
back to meeting the lenders’ current credit assessment criteria, As we are still in an extremely low Interest Rate Cycle, standard variable rates remain at 5.25% for the most major banks. This low interest rate cannot last for ever. Reports indicate that the lenders continue to review their variable and fixed interest rates, especially for investment borrowers.
Investors with previous Interest- Only Loans coming to an end of the “Interest Only period” are now realizing that they are facing the prospect of increased monthly payments which cover principal and interest over the remainder of their loan term. A recent report from the Governor of the Reserve Bank of Australia indicated caution and concern for such borrowers where their inability to reduce debt levels on Principal and Interest places the
borrower’s repayment capacity in jeopardy.
Investors are subject to stricter lending guidelines. Negative gearing effectiveness varies from lender to lender, and clearance of debts must be within acceptable time frames. Most lenders now require very detailed exit strategies from mature borrowers (above 45 years old) to ensure that the proposed debt can be cleared on or prior to retirement. In light of this, investor borrowers seeking to extend their Interest-Only Loans for further interest only periods will be subject to tighter assessment criteria.
If you are keen to explore and discuss your loan possibilities please contact Paul today 1300 FLAKUS