Australia’s prudential regulator tightens mortgage lending rules

Australian regulators are introducing a new suite of macroprudential rules to target risky lending by banks, as they seek to cool fast rising house prices in the country’s biggest cities.

New figures released this week show residential property prices in Sydney and Melbourne rose by 19 per and 16 per cent respectively over the past 12 months, prompting concerns among some commentators that a “housing bubble” could emerge.

In a report on Friday the Australia Prudential Regulation Authority said almost 40 per cent of new mortgages are being issued to borrowers on “interest only” terms. It noted this was a high rate by international and historical standards.

“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile,” said Wayne Barnes, APRA’s chairman.

Under the terms of an interest only loan a borrower only pays the interest on mortgage, and not the principal of the loan, for a specific term that is typically fixed for a number of years.

Mr Barnes said APRA would move to limit the flow of “interest only” lending to 30 per cent of new residential mortgage lending. It would also place strict limits on the volume of interest only lending at loan to value ratios above 80 per cent, said Mr Barnes.

However, APRA has not expanded its existing rules on growth in new lending to investors. In 2014 regulators placed a 10 per cent limit on growth in new lending to investors, in a bid to curb a rapid increase in lending to the buy to let sector that at the time accounted for half of all mortgages issued.

Mr Barnes said he believed the 10 per cent benchmark continues to provide an appropriate constraint in the market.

Michael Turner, analyst at Royal Bank of Canada, said the new measures “erred to the softer end of expectations”.

“Relative to the earlier measures, we doubt that the impact will be as large, although it is still reasonable to expect some slowing in investor activity through 2017 given declining rental yields, increasing mortgaging rates, and oncoming supply,” he said.