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Australia’s banking watchdog the Australian Prudential Regulation Authority (APRA) has suggested on Friday of removing home-loan caps on investor lending, as it saw improvements on mortgage lending standards and investor loans demand.

APRA chairman Wayne Byres stated that the 10 percent restriction on banking lending to property investors was probably reaching the end of its useful life.

Lifting the cap could ease the pressure on mortgage rates for investors, since its implementation has pushed banks to increase rates to stay within the limit. It would also allow banks to write more investor loans, boosting credit.  

Byres cited better mortgage lending standards and lower demand for investor loans for why the 10 percent restriction is potentially becoming redundant.

Investor loan growth has now fallen below 5 percent, half the rate of the cap, while new interest-only lending has dropped by a third to about 20 percent.

The APRA chairman said that they still have some work to do before they can officially say that they are completely comfortable, but they believe the industry is writing better quality business than it was a few years ago.

The exact timing for the removing the cap was not specified and would have to follow further talks with the Council of Financial Regulators.  

However, APRA stated that it would not remove other key lending restriction, such as the 30 percent interest-only limit on new loans issued.

Byres said it was somewhat at a new stage and he wanted to see how the industry settles and where it settles before considering of lifting it, suggesting that it would not happen right away.     

About six months after 30 percent cap was imposed, home prices in Australia’s major east-cost housing started to fall.

Banks Struggle with 10 Percent Cap

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The limit, which was imposed in December 2014, gave the financial regulator the right to get involved if an individual bank grows more than 10 percent in investor lending during 12-month period.

At that time, APRA and the Reserve Bank of Australia (RBA) grew more and more concerned over speculative factors in the property market, as well as the banks’ poor lending standards.  

Facing pressure from regulators, banks have in recent years revamped their ways for evaluating customers’ earnings, debts, cost of living, and their sensitivity to higher interest rates.

APRA’s involvement in the mortgage market have also been criticized by the Productivity Commission for being too blunt and for creating additional tax deductions for property investors.      

Smaller lenders had expressed disapproval of the restriction as well, since it was holding back competition by restraining existing market shares.

Moreover, the Productivity Commission had questioned the $1 billion annual income earned by the banks, given that they did not only bolstered investor borrower rates on new lending, but on their earlier loans known as the back book.

During the 2017 fiscal year, Australia’s so-called Big Four banks reported combined net earnings of A$31.5 billion ($24.4 billion), adding 6.4 percent from the previous year.

The country’s major banks control 80 percent of the lending market and have presented record profits for years.

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