Interest-only home loan customers tipped to pay higher premium

Customers with interest-only loans are likely to be charged an even higher premium by banks compared with those who are also paying back principal, home loan experts predict.

Interest-only loans, which until recently made up about 40 per cent of all new home loans, are the prime targets of a crackdown by regulators intent on cooling the mortgage market.

Low interest rates are fueling a high demand for housing despite tighter lending rules, says St. George Bank Senior Economist Janu Chan.

The Australian Prudential Regulation Authority in March ordered banks to lower the proportion of new interest-only lending to 30 per cent, and since then banks have jacked up the relative cost of interest-only loans by up to 0.56 percentage points, new RateCity figures show.

Close watchers of the home loan market believe this gap is only likely to widen further in the future, as growth-hungry banks try to convince more customers to pay off principal on their loan, giving lenders more room to expand their interest-only lending without falling foul of APRA's cap.

RateCity chief executive Paul Marshall said changes of recent months now meant interest-only customers were paying a significant penalty compared to owner-occupiers who are also paying back principal.

Research from RateCity found property investors with an interest-only loan were paying an average interest rate of 4.88 per cent, compared with 4.31 per cent for those who lived in their home and were paying it down.

"If APRA continues to apply pressure on the banks and brings other lenders under its control, the average gap is likely to widen by 20-40 basis points more," he said.

Mortgage Choice chief executive John Flavell predicted the gap between what banks charge for an interest-only loan and a principal an interest loan could widen to about 0.7 percentage points.

Interest-only loans typically revert to being principal and interest loans after about five years.

"I would expect some pretty aggressively pricing in terms of people rolling over their interest on loans and encouraging them to go principal and interest," Mr Flavell said.

"The difference between principal and interest-only loans will widen further."

Even so, Mr Marshall questioned how much the recent round of rate hikes would deter some buyers. He said a bigger test for investors would be the demand of banks that investors who want an interest-only loan have a deposit of at least 20 per cent.

Significantly, owner-occupiers who are paying principal and interest could benefit from greater competition among banks to secure their business in this environment.

ANZ Bank was the latest bank to raise rates on Friday, hiking interest only-loans for the second time in three months, but it also trimmed rates for principal and interest loans.

Figures on Friday also confirmed the impact of APRA's crackdown, with the Bureau of Statistics reporting a 2.3 per cent drop in new lending to investors during April.

Aussie Home Loans chief executive James Symond last month told BusinessDay the latest crackdown from APRA was slowing new interest only-lending, which is mostly used by property investors.

"There's no doubt that we are seeing these regulatory policies bite. If you look at interest only loans, they are materially down year on year, as they should be," Mr Symond said.

"You look at investment loans, they are down year on year as well because of these regulatory changes."

On the other hand, Mr Symond said there had been some growth in lending to owner-occupiers and people refinancing their mortgages. There were also signs of life in the first home buyer market, although these buyers remained challenged in Sydney.

SMH / June 12 2017

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