Smaller lenders are courting interest-only borrowers

While the Australian Prudential Regulation Authority’s (APRA) latest curbs on higher-risk interest-only loans are forcing major banks to reduce their interest-only loan book, smaller lenders are seizing the opportunity to grab new interest-only borrowers, according to analysis by The Australian Financial Review.

Small lenders are cutting rates on interest-only, low-documentation, and investor loans as the majors tighten conditions and bump up rates for risker borrowers.

CBA-owned Bankwest,, and Bluebay Home Loans are the latest lenders to cut rates by up to 20 basis points, reduce investment loan loadings for low-documentation loans, and boost features for borrowers who might not qualify with the Big Four.

Last week, ING, Macquarie Bank, and Virgin Money reduced rates on their interest-only products, despite regulatory efforts to curb growth in interest-only lending due to concerns about mounting household debt.

Interest rates for investors on interest-only loans have risen by about 60 basis points since late 2016, according to the Reserve Bank, which has been encouraging lenders to pressure borrowers to pay down debt.

However, lucrative capital gains tax breaks, lacklustre income growth, and soaring property prices are continuing to fuel demand.

Also read: The coming crisis with interest-only loans