APRA has announced that it will remove its supervisory benchmark on interest-only residential mortgage lending by authorised deposit-taking institutions (ADIs) which confirm that their lending policies meet APRA’s expectations as set out in Prudential Practice Guide APG 223 – Residential Mortgage Lending (APG 223) and which are no longer subject to the investor loan growth benchmark, with effect from 1 January 2019. For other ADIs, it will be removed concurrently with the removal of the investor loan growth benchmark. Background.
The interest-only residential mortgage lending benchmark was introduced as a temporary measure in March 2017 to reinforce sound lending practices and has led to a reduction in the proportion of new interest-only lending, to below the 30% threshold.
In APRA’s view, interest-only mortgages, and in particular owner-occupied interest-only lending, remain a higher risk form of lending. As a result, APRA expects that ADIs will maintain prudent internal risk limits on interest-only lending. APRA says these internal limits should cover both the level of new interest-only lending and the type, including lending on an interest-only basis to owner-occupiers and lending on an interest-only basis at high LVRs. As noted in APG 223, interest-only periods should be of limited duration, particularly for owner-occupiers, and serviceability assessments should test borrowers’ ability to repay principal and interest over the actual repayment period (excluding the interest-only term).