Major announces drastic IO mortgage overhaul

by Miklos Bolza19 May 2017
The Commonwealth Bank of Australia (CBA) has announced major changes to interest only payments for both owner occupied and investment home loans.

Effective from Monday 22 May, the bank will offer the following reduced discounts for new owner occupied and investor home loans with interest only payments:
  • A reduced discount offered through the Home Loan Pricing Tool (HLPT) for new home loan and investment home loans with IO payments
  • The elimination of any discount for those who submit a pricing request for new home loan and investment home loans with P&I repayments who later switch to an IO repayment type
CBA's $1,250 Refinance Rebate for select interest only owner occupier home loans will also end. This rebate will only be available for owner occupier principal and interest home loans via the HLPT.

The bank has also made further LVR changes which will be effective from Saturday 10 July:
  • Reducing the maximum LVR from 95% to 80% for new owner occupier interest only home loans
  • Reducing the maximum LVR from 90% to 80% for new investment interest only home loans
CBA says it will honour existing policies for applications submitted for assessment by COB Friday 9 June.

Lastly, changes have also been made to repayment types for building and construction loans. These will be effective from 10 July.
  • CBA will no longer accept IO payments for home loan and investment home loans which are construction or building loans. Instead, the loans must have P&I repayments after construction is complete and the loan has been fully funded
  • CBA will permit construction loan applications submitted for full assessment by COB 9 June with IO payments to proceed to funding
The major reminds brokers that repayments on P&I construction loans are interest only until building is completed and the loan is fully funded. At this point, payments switch to P&I. This means the bank will apply the lower P&I reference rate to the interest charged during the construction period.

"In March, the Australian Prudential Regulation Authority (APRA) announced the introduction of a new measure to limit the flow of new Interest Only (IO) residential mortgage lending to 30%. Commonwealth Bank is committed to ensuring we meet our customer’s needs while maintaining our prudent lending standards and meeting our regulatory requirements," the bank wrote in a statement to brokers.

"To help meet these commitments, we are introducing changes that encourage customers to choose principal and interest repayments, where this meets their needs. We are also increasing our already robust monitoring and reporting activities to ensure that where Interest Only payments are selected, they are suitable for customers’ needs."

COMMENTS

  • by Brett of Brisbane 19/05/2017 1:39:11 PM

    I'd be interested in finding out how a bank, in its overall development of policy, can formulate a strategy for identifying when 'interest only' repayments are suitable for individual clients, investor or otherwise. Each client and situation is different, with current and future plans requiring consideration for deciding with product, rate structure and repayment structure are appropriate. Mandates by government regulators, incorporating fear of unknown strategies, have come too rapidly for the medium and long term effects of borrowing practices (not lending practices) to be gauged.