Banks tighten investor lending as regulators turn the screws

Ultra-low interest rates have again sparked a surge in new property investment lending, and the regulators are clamping down on the lenders.

According to the Australian Financial Review (AFR), Commonwealth Bank of Australia (ASX: CBA) and other lenders are tightening investor lending conditions, including cutting interest-only terms.

CBA had already tightened lending conditions in July, but is now offering 10-year interest only terms for those borrowers that live in the property. Those with an investment loan can only get up to 15 years’ interest-only, and its principal and interest repayments after that.

Westpac Banking Corp (ASX: WBC) had already cut its maximum allowable interest-only term to 10 years for investors, and its subsidiaries, St George, Bank of Melbourne and BankSA are now following suit.

Smaller lenders, including Homeloans Limited (ASX: HOM), Bendigo and Adelaide Bank Ltd (ASX: BEN) are also reportedly telling mortgage brokers that the maximum interest only period for all owner-occupied home loans has been cut to 7 years from 10 years.

The AFR reports that the pressure is coming from the banking regulator, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA). Arguably the RBA kicked off the surge in investor borrowing by lowering interest rates twice so far this year – once in May and the last time in August, taking the cash rate down to 1.5%.

That saw the banks pass on around half-to-three-quarters of the total 0.5% cut to borrowers, lowering standard variable mortgage rates to below 5%, while many non-bank lenders are offering rates of under 4%.

Auction clearance rates in Sydney and Melbourne have been booming – regularly topping 80% as buyers scramble for the few properties on offer.

Some economists expect the RBA to cut the cash rate even lower this year, which could exacerbate the problem – along with what appears to be a lack of supply.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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