In rapid succession, both the Australian Prudential Regulation Authority (APRA) and the Australian Securities & Investments Commission (ASIC) have recently made public announcements regarding interest-only residential mortgage lending.
APRA announced on 31 March 2017 that it had communicated to authorised deposit-taking institutions (ADIs) that it expects ADIs to:
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).
Since December 2014, APRA has been closely monitoring residential mortgage lending trends and how this impacts the resilience of lenders, as well as the household sector more broadly. The further steps described above are in response to what APRA perceive as an environment of heightened risks. 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.
Also, APRA has reiterated that it continues to be focused on serviceability assessments and the methodologies ADIs use. They have chosen not to impose specific quantitative limits for serviceability assessments at this stage, but stressed that it is important that borrowers retain some level of financial buffer to allow for unexpected events, especially borrowers with high levels of debt.
So what does this mean for you?
Never before has it been more important to get the right advice. At ALIC we are committed to providing our clients with the best strategy and structure to meet your long term wealth creation needs.
The potential changes in the market are targeted at those aggressively speculating on the property markets and not those that are looking to drive a sound investment strategy. Less than 17% of the 1.8 million investment property owners have more than 1 investment property. As many of our clients know we are not into speculative or high risk strategies. Our buyers agents and financial planners are well researched and focus on quality assets with both growth and yield playing critical importance to your strategy.
Change and focus on the way your structure your loans (interest only or principle and interest) is important. Our goal has always been to improve our clients position through owning their own home faster and reduce their home loan debt first. As your accountants will always tell you that you should seek quality assets over tax driven investments.
So what should you do now?
Like any good investment strategy you should always be reviewing it. So call us today and make a time with your Investment Lending Manager to discuss your current position and how we can continue to work with you to drive the right strategy and structure for your debts.
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