Interest only mortgages are taboo in Australia.
The banking regulator in March declared a war on such home loans and told banks to limit interest only mortgages to 30% of all new approvals.
Those formed part of proposals to tighten lending to speculators who were driving up home values just as household debt soared to a record.
Teachers Mutual Bank, a lender with $4.8 billion in home loans or a 0.3% share of the $1.6 trillion mortgage market, has come up with a way to meet the regulatory requirement.
It now requires a minimum of 50% loan component where a borrower repays principal and interest, which means the maximum interest-only part is also 50%.
For instance, a borrower seeking $500,000 interest only mortgage will need to have two loans a minimum of $250,000 on principal and interest and a maximum of the same amount as interest-only.
“All financial institutions are required to meet the regulator’s expectations of maintaining interest only lending growth at less than 30%, and Teachers Mutual Bank Ltd has been transparent in introducing measures that are similar to other lenders,” said Steve James, chief executive of Teachers Mutual Bank.
Other lenders have instead raised the minimum deposits to at least 20% of the value of a home to qualify for an interest only loan from as low as 5% earlier. They have also raised interest rates and tightened approval criteria for such loans to temper the momentum.