Originally posted on 18 September, 2017 on The Age website. Article written by Clancy Yeates.
Banks are wading back into the market for interest-only home loans, cutting fixed interest rates as the industry grows more comfortable with a regulatory cap on higher-risk lending.
Lenders including Commonwealth Bank, ANZ Bank and Suncorp last week cut some of their fixed interest rates, including for customers with interest-only loans, who have been targeted by regulators this year in a bid to cool the housing market.
The rate cuts, which come at a time that is traditionally strong for property sales, suggest banks want to lift their growth among property investor and interest-only customers after clamping down on these buyers earlier in the year.
The Australian Prudential Regulation Authority has this year forced banks to cut the proportion of new home lending that is interest-only to less than 30 per cent, which has led to tighter credit for these buyers in recent months including higher rates and tougher rules on deposits.
However, there are signs some of this pressure is now easing. Interest rate comparison website Mozo said almost a third of the lenders in its database had cut one of their fixed rates since the start of August.
CBA, the nation's biggest bank, last week cut four and five-year fixed rates by between 0.1 and 0.2 percentage points, including for interest-only customers, amid a flurry of similar cuts over the last month.
ANZ Bank also cut its two-year fixed loans rate for customers only paying interest on their loans by 0.1 percentage points, to 4.64 per cent. In contrast, it raised two-year principal and interest fixed rates by 0.31 percentage points, to 4.34 per cent - a move that narrows the premium interest-only customers are being charged.
Mozo director of marketing and communications Kirsty Lamont said banks were keenly competing for owner-occupiers as well as property investors who were paying both principal and interest on their loan.
"Investors paying principal and interest have actually enjoyed the biggest rate discount, with one year fixed rates slashed by an average of 29 basis points," Ms Lamont said.
Westpac has also cut fixed rates over various terms in the past month, for both interest-only loans and those where principal and interest is being paid.
Australian Prudential Regulation Authority chairman Wayne Byres noted the changes last week, saying these were a sign lenders were trying to lift their growth towards the limit imposed by APRA.
"There are some banks that have announced some shaving of certain fixed rates and other things—because they are clearly trying to recalibrate to get just inside what we would like to do, but no more," Mr Byres said.
Managing director of broker Homeloanexperts.com.au, Otto Dargan, said the recent cutting was a sign of banks getting the right balance between being competitive, without falling foul of the regulator's caps.
"It looks like the banks went a little too far with putting up their fixed rates for investment and interest only loans," he said.
Constraints on interest-only lending are likely to be a key reason why property prices have dipped in recent months, with latest figures showing Sydney's market was flat in August, while Melbourne house prices rose 0.5 per cent.
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