- Since APRA’s lending restrictions in March 2017, the average portfolio share of interest-only loans among the big banks has fallen from 39.5% to 27.9%.
- The shift in behaviour partly illustrates the effect of tighter lending standards, which have been cited as the main catalyst for Australia’s housing downturn.
Westpac’s full-year results this morning rounded out big bank reporting season, after NAB and ANZ presented earnings last week.
Interest-only loans have been a key area of focus, since APRA enforced limits on interest-only lending in March last year.
About six months after that, prices in Sydney and Melbourne started falling, and they haven’t stopped falling since.
It’s coincided with an equally rough trot for the big banks, with the ASX200 Banks Index posting falls of more than 20% since May last year.
And in response to the tighter lending standards, the latest results show that a clear shift has taken place in the lending behaviour of the major banks.
This is what the shift looks like:
*CBA has a June 30 year-end, so the CBA figures above are effectively three months prior to each date period shown in the chart.
Westpac stands out, given that prior to APRA’s restrictions a full 50% of its loan book was interest-only. It’s now reduced that total by 30%.
Among the big four, ANZ has been the most aggressive in reducing the interest-only share of its portfolio. Its 22% share represents a decline of 39% from March 2017 levels.
The changes are reflective of the tighter credit conditions in Australia’s housing market, which are generally cited as the main factor dragging on prices.
Each of the big banks are also well inside APRA’s prescribed limit, which restricts interest-only lending to 30% of new loan flow.
The latest bank results show that a material number of customers are also converting their loans from interest-only into principal & interest repayments.
Most interest-only loans have an initial term of five years. So given that interest-only lending topped out in early 2015 at almost 50% of all new loan flow, interest-only rollovers are expected to peak over the next two years.