APRA, the Australian Prudential Regulation Authority last year forced the banking sector to limit interest-only (IO) lending to 30% of all new loans, down from 46%. Today borrowers holding some $400 billion in IO loans are facing arguably the tightest lending squeeze in modern history in addition to out of cycle bank increases to interest rates.
As we go to press, Macquarie Bank has signaled they will increase variable owner occupied rates by 6 basis points (0.06%) while IO and investment loans will increase by 10 basis points (0.10%) and whilst not “end of world” it is a worrying headwind likely to be mirrored by the big four as international and domestic pressures build on bank and non-bank alike funding costs. Some economic pundits are predicting the A$ to fall as low as US70 cents in the very near future putting more pressure on already strained inter-bank and bond rates.
What this means for all borrowers, but notably borrowers whose IO mortgages are maturing in the next 2-3 years, is; as Morgan Stanley and UBS have put it; “ a renewed warning of a credit crunch” not seen since our last major property/loan correction in the early 1990’s.
By Richard Aulsebrook