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Australian regulators introduce tighter rules for home loans

Australia's banking and securities regulators introduced tighter rules for the home loan sector, including setting new limits on banks' interest-only lending and starting a targeted surveillance of banks and brokers that inappropriately recommend such loans.

The Australian Prudential Regulation Authority and the Australian Securities and Investments Commission released new regulations to promote the quality of mortgage lending and to ensure that consumers are provided with suitable interest-only loans.

APRA said March 31 that it expects banks to limit the flow of new interest-only lending to 30% of their total new residential mortgage lending with strict internal limits on the volume of interest-only lending at loan-to-value ratios above 80%. Banks are also required to manage lending to investors to remain below the advised benchmark of 10% growth.

APRA Chairman Wayne Byres noted that interest-only loans represent nearly 40% of residential mortgage lending by banks, which is quite high by international and historical standards.

APRA is also monitoring the growth in warehouse facilities provided by banks to other lenders. These facilities allow banks to build a portfolio of loans that will eventually be securitized.

Meanwhile, ASIC said April 3 that it will initiate a targeted industry surveillance to examine if lenders and mortgage brokers are recommending more expensive interest-only loans rather than principal-and-interest loans.

Eight major lenders will also compensate customers who have suffered financial difficulties due to shortcomings in their past lending practices. ASIC had found in a 2015 review that lenders were not properly inquiring into a consumer's living expenses while assessing their capacity to make repayments. The eight lenders are Australia & New Zealand Banking Group Ltd., Bendigo & Adelaide Bank Ltd., Commonwealth Bank of Australia, Macquarie Bank Ltd., Firstmac Ltd., ING Bank (Australia) Ltd., National Australia Bank Ltd. and Pepper Group Ltd.

The eight lenders examined by ASIC have improved their practices and are now using actual figures for different categories of living expenses. They will still need to review cases where consumers suffered financial difficulty in repaying their home loans and determine if they have been affected by shortcomings in past lending practices. Lenders will have to provide consumers with tailored remediation, which may include refunds of fees.

APRA had required banks to keep portfolio growth to investors at no more than about 10% in 2014 amid high household debt and low interest rates.

The new measures introduced by Australian regulators to restrict mortgage lending are credit positive for Australian banks as they will curb the growth of riskier mortgage loans, Moody's said April 4.

Moody's expects banks to raise interest rates on interest-only loans to limit growth in the segment and to support their margins from ongoing price competition.

However, the new measures may not be as effective in curbing house price appreciation particularly as low interest rates continue to support housing demand, Moody's said. The rating agency continues to expect upward pressure on house prices in Australia amid an environment of low interest rates.