There's a big shift underway in how Australians are borrowing for property

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Westpac’s results this morning revealed a clear shift underway in consumer behaviour in the wake of regulatory restrictions introduced in April.

The bank reported a 3% rise in full year cash profit to $8.06 billion for the financial year ended September 30, slightly below forecasts.

And Westpac’s full-year results were indicative of a recent trend which could weigh on the earnings outlook — the switch by borrowers from interest-only to principal and interest repayments.

The shift follows macro-prudential regulations issued by the Australian Prudential Regulation Authority (APRA) on April 1, capping interest-only lending at 30% of all new loans issued.

Since then, the big banks have introduced multiple out-of-cycle rate rises on interest-only loans.

In Westpac’s case, the customer-response has been evident with borrowers voluntarily moving into interest-only repayments on over $12 billion worth of loans in the June and September quarters — more than double the previous two quarters combined:

Source: Westpac investor presentation

UBS banking analyst Jonathon Mott highlighted the shift into principal and interest loans as one of the main challenges for Westpac’s revenue growth.

“2018 financial year margins will be impacted by more mortgage switching from interest only to principal & interest,” Mott said.

“Growth is predicated on reduced funding costs and provision charges remaining very low.”

Westpac has the highest proportion of interest-only loans among the big four banks, with around half its loan-book on interest-only terms.

This table shows interest-only loans as a proportion of the total lending portfolio for each of the big major banks, as at the end of the most recent financial year:

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