APRA chairman warns of ‘repayment shock’ for interest-only borrowers

At the A50 Australian Economic Forum in Sydney last Friday, Wayne Byres, Chairman of the Australian Prudential Regulation Authority (APRA), expressed concern over home loan borrowers’ growing exposure to “repayment shock”. 

“Over many years we’d seen interest-only loans become easily available, and options for extending or refinancing on interest-only terms allowed borrowers to avoid paying down debt for prolonged periods.” he said. “Those loans do, however, provide less protection to borrower and lender when house prices soften, and expose borrowers to ‘repayment shock’ when the loan begins amortising (made worse if it occurs at a time when interest rates are rising from a low base).”

Byres emphasised that APRA’s latest curbs on higher-risk interest-only loans are producing concrete results. 

“Our benchmark of no more than 30 per cent of new lending being on interest-only terms is not overly restrictive for borrowers who genuinely need this form of finance – roughly 1-in-3 loans granted can still be on an interest-only basis – but it has required the major interest-only lenders to establish strategies that incentivise more borrowers to repay their principal. 

“The industry has been quite successful in doing so: recent data for the last quarter of 2017 shows that only about 1-in-5 loans were interest-only, and the number of interest-only loans with high LVRs continued to fall to quite low levels. All of that is positive for the quality of loan portfolios.”

Heightened stress could be just around the corner for interest-only borrowers, with recent data indicating that house price growth has slowed down considerably in Sydney and Melbourne. 

Economists predict that the Reserve Bank will begin raising the official interest rate from its current record low of 1.5% sometime towards the end of this year or early in 2019. It has been widely reported that the Reserve Bank is in no hurry to adjust rates, but the next move is certainly going to be up.