The quarterly property exposures data of authorised deposit-taking institutions (ADIs) reveals a big fall in interest-only mortgage lending in the June 2017 quarter. Although the Australian Prudential Regulation Authority (APRA) has mandated a 30% cap on interest only mortgage terms, this cap becomes effective from the September 2017 quarter. The latest data indicates that although there is still some work to do, most of the heavy lifting was done over the June 2017 quarter.
In the June 2017 quarter there was $30.083 billion worth of interest-only mortgages approved, which was -7.0% lower than the value over the March 2017 quarter and -16.7% lower than the June 2016 quarter. In fact, the $30.083 billion in interest-only mortgages was the lowest quarterly value since March 2016.
As a proportion of total lending over the June 2017 quarter, interest-only accounted for 30.5% of the value of all new mortgage lending. The black line on the above chart represents the 30% cap which is currently being implements. The 30.5% is the lowest proportion of lending for interest-only purposes since March 2009 when interest-only mortgage lending accounted for 27.4% of all new lending. The proportion of new interest-only lending peaked at 45.6% of all new lending over the June 2015 quarter and has been trending lower since. Of course, APRA recently (end of March 2017) advised ADIs that new interest-only lending needs to be comfortably below 30% going forward. From our liaison with lenders we understand that by the end of the September 2017 quarter they are required to be below this threshold. While the June 2017 data shows a slowing from March, there is clearly still some work to be done to get below this threshold.
Comparing June 2017 to June 2016, the total value of outstanding interest-only mortgages increased by 4.3% which was a record low annual change. As the chart shows, the growth in the portfolio of outstanding interest-only mortgages has been slowing for some time with the figure -0.4% lower over the quarter.
Interest-only mortgages account for 38.2% of the total value of outstanding mortgages and this proportion is clearly much higher than the proportion for the flow of new lending. Remember that the typical interest-only term on a mortgage is five years so the recent reduction in new interest-only lending will take some time to flow into the overall portfolio. If we assume that interest-only mortgages are on a five year term, those written in June 2012 came to an end in the June 2017 quarter however, even though new lending has slowed the value of new interest-only mortgage lending was 27.2% higher than in June 2012.
Assuming that these caps remain in place for some time, the overall portfolio value of interest-only lending should start to fall significantly by 2020 given that new interest-only mortgage lending was peaking in early to mid-2015.
Interest-only lending is clearly an area of concern for regulators thus why a cap has been introduced. The Reserve Bank reports that around 70% of interest-only mortgage lending is utilised by investors with the remaining 30% by owner occupiers. The main concerns surrounding interest-only lending is that the principal is not reduced during the interest-only period which results in higher overall repayments for the mortgage once the interest-only period concludes.
From a borrower’s perspective, interest-only remains attractive, particularly by investors, due to the tax treatment of investment properties whereby the interest component of a mortgage is tax deductible but the principal is not.
Going forward lenders will have a lot of work to do to ensure that they remain below the 30% cap. We’re quite sure that interest-only, where available, will remain a popular product however, the availability of this product is sure to be reduced while the cap remains in place.