Banking regulators are tightening the screw on profitable interest-only loans in case things go sour in an economic downturn.
With interest-only loans, the borrower pays only the interest on the principal balance and they have seen a surge in popularity in recent times.
It has brought the Australian Prudential Regulation Authority and other regulators to lean on banks to slow the growth in these loans, and so far they have been successful.
Interest-only loans have now slipped back down to one in three of total mortgages.
Martin North from Digital Finance Analytics spoke to The Australian Financial Review.
“Lenders still want loan growth but regulators have cut them off at the pass,” he said.
“This is all being done with quiet whispers to the banks.”
Regulators starting taking notice when interest-only loans swelled to 43 per cent of the market which they feel is too high, and they would want to avoid further growth causing a price bubble situation as has happened in markets overseas.
Interest-only loans are profitable and popular because monthly payments are lower for the borrower. They also appeal to negative gearers who can make big tax deductions.
If house prices fall or don’t appreciate much then borrowers can come unstuck however, as they still have the full loan amount to pay off once the term ends and haven’t made any capital gains.
“Banks are actively pushing households in other directions, to reduce the volume of interest-only loans,” Mr North told The Australian Financial Review.
“That means interest-only loans are now less available.”