What’s all the hype surrounding interest only loans?
It seems every day there is a new article regarding interest only lending on properties and how it needs to be stopped.
Firstly, it is important to understand why these discussions are happening and what the underlying issue is.
APRA (Australian Prudential Regulation Authority) is an authority that governs the banks and their policy to ensure the stability of the Australian Financial system.
Their investigations have found that interest only loans in Australia are rising and are believed to be at dangerous levels.
This has been brought on by the huge growth seen in the Sydney and Melbourne property markets over recent years prompting buyers to pay interest only and wait for the huge capital growth.
The Australian tax law is written to encourage property investors through negative gearing as an incentive to provide housing to the population.
This makes it a tricky decision when making changes to any policy.
OWNER-OCCUPIER VS INVESTOR
At present a lot of Australian lenders, especially the major banks are sitting around 40% of their loans currently being on interest only.
Of that 40%, three quarters are for investment properties. Based on the tax law and the fact these people may have debts on their own home they are also paying off isn’t so bad and makes sense why these buyers have done this.
The alarming figure is that one quarter or 10% of all loans are interest only loans for owner occupied properties, meaning they are not paying anything off their own home loan.
Why anyone would think this is a good idea is a mystery. There will always be a situation where it is necessary such as losing employment or having a child and going back to one wage for a short period.
However as a general rule this is not a sound financial decision.
Knowing the rigorous procedures the banks have in place for lending I can assure you that these loans would have been scrutinised upon application and serviceability would have had to be evident for the loan to be approved.
The problem is usually found in living expenses over the norm or not inline with their income and position.
Well know property tycoon, Tim Gurner recently added fuel to the fire saying that first home buyers need to stop buying $19 smashed avo and $4 coffees if they want to get into the property market.
While this has been taken out of context slightly, the underlying message of people living beyond their means rings true.
In the last few days we have seen ANZ reduce interest only lending to a maximum loan to value ratio of 80%.
Westpac and St George have reduced it to 90% (including fees) and there is no doubt more tightening on the way.
APRA has now ordered all banks that no more than 30% of their loans may be interest only at any one time.
This has caused the recent interest rate rises in interest only loans.
I believe a simple fix to the problem is to stop all interest only lending to owner occupied borrowers, this will leave the room for investors to continue to support the economy and provide housing for the Australian population.
It is an interesting space at the moment and we will be watching it closely.
For more on your lending needs, contact Jai at Evolve Loans by clicking here.