It certainly is a happy new year for property investors. As of January 1st, the Australian Prudential Regulation Authority (APRA) has lifted the cap on interest only loans.
I’ll explain why they’ve lifted the cap and most importantly why you should care.
What is an interest only loan?
First things first though, let’s make sure we’re on the same page about what an interest only loan is…
A mortgage or home-loan is split into two parts – the principal (loan amount) and the interest you are paying on that loan.
When you enter into an interest only loan, you’re only paying the interest on the loan not the principal for a certain period of time. One of the benefits of an interest only loan is that your repayments will be cheaper during the period that you are on the interest only loan. For most lenders, the maximum period that you can go ‘interest only’ is 5 years. The downside is that you’re not actually paying the debt off during that interest only period.
Interest only loans can be fantastic for cash flow purposes. They may also help to maximise tax deductions. It’s important to understand though, that once that interest only period is over then you need to catch up on the principal that you missed paying, and then, that mortgage becomes quite expensive. It’s important to seek professional advice from your Mortgage Broker and your Accountant to weigh up the benefits and disadvantages of interest only loans.
Why did APRA put the cap on interest only loans in the first place?
At their peak interest only, loans accounted for 46% of all mortgages.
In March 2017, APRA placed a 30% cap on interest only loans. This meant that that for all of the mortgages banks/lenders have in their ‘loan book’ only 30% of them could be interest only loans. APRA wanted to minimise the flow of interest only loans to customers. Their reasoning was that interest only loans are riskier for borrowers.
The interest only lender restrictions followed another cap imposed by APRA on investor lending. The cap on investor lending put a 10% limit to growth in banks’ lending to housing investors.
These measures resulted in banks and lenders raising investor interest rates and requiring bigger deposits. This in turn, led to the property investor market taking a step back.
The 10% cap has since been lifted for banks and lenders who could prove that they had met requirements advised by APRA. These requirements included their property investor loan book growth being below the benchmark.
Why did APRA decide to lift the cap and why should you care?
In December 2018, APRA announced that they would lift the 30% cap on interest only loans as of January 1, 2019. The cap had successfully reduced the proportion of new interest only lending, which is now significantly below the 30% threshold.
I don’t believe the cap was removed due to softening housing markets, in my opinion, the timing is coincidental.
This news is particularly interesting for property investors.
I predict that the cap being lifted will result in better interest rate pricing for investors. At the moment, you have two tiered pricing for interest only and principal and interest loans. There’s also another sub tier attached to that based on how much equity you hold in your investment property. I think that this year lenders will start putting out some better interest rate pricing.
With a softening market and the cap on interest only removed, 2019 might be an ideal time for you to consider starting or expanding your property investment portfolio. Your first steps would be to speak to your Accountant and Mortgage Broker. If you’d like to chat about how the changes to interest only loans could affect you please get in touch.
If you’re thinking of starting or expanding your property investment portfolio, I’d love to help you. I’m only ever a phone call or an email away. I’m co-located with an Accountant who specialises in property investment, so with her expert advice we can set you up with a smart strategy.