![Westpac is reducing the maximum allowable interest-only term for investment property loans to 10 years.](/content/dam/images/1/1/r/y/o/9/image.related.afrArticleLead.620x350.grtx0e.png/1475582677364.jpg)
Westpac is toughening lending conditions on investment property loans, the third change to its mortgage products in three months because of growing regulatory pressure to clamp-down on interest-only products.
Rate rises, mortgage withdrawals, higher costs and tougher conditions have been announced since July when lenders flooded the property market with fixed rate home loans to boost flagging demand caused by a slump in overseas and first time home buyers.
Westpac is reducing the maximum allowable interest-only term for investment property loans to 10 years. The interest-only term could previously be extended to 15 years, according to brokers.
In addition, the 12-year fixed rate investment property loan and its low documentation equivalent will no longer be available. The changes also apply to all special borrower packages.
Mortgage brokers, who are intermediaries between lenders and borrowers, said many lenders had been tightening conditions and special discount rates.
Christopher Foster Ramsay, principal of Foster Ramsay Finance, said during the past six weeks some lenders had "stopped aggressively going for market share" by trimming margin discounts and tightening terms and conditions.
According to the latest APRA monthly banking statistics to the end of August, total lending for housing rose about 0.5 per cent, equivalent to an annualised rate of 6.4 per cent, which is well ahead of inflation and wage growth.
Owner-occupied loans rose about 6 per cent, or $6 billion, and investment loans about 0.35 per cent, or $1.8 billion. Investment loans comprise about 35 per cent of loan books.
Westpac's portfolio grew the fastest, by about $2.5 billion, followed by CBA.
Martin North, principal of Digital Finance Analytics, said regulators are "bearing down very hard" on lenders to tighten interest-only loans because of concerns that borrowers might have problems repaying the principal, particularly if there was a sharp market correction.
"Westpac is successfully growing its lending book. It might not have to grow the long term interest only leg of its business," he said.
Banks are also under less pressure to build term deposits because of recent regulatory changes easing liquidity requirements.
Other lenders, such as Adelaide Bank, are also set to announced to changes to interset-only owner occupied residential loans.
Its maximum interest-only term for all owner occupied residential loans will be reduced from 10 years to seven years.
In August, the bank cut discounts on its showcase Flexi First Option Home Loan packages that provide loans to principal and interest, interest-only and investor loans.
It also cut discounts on its home loan packages for house buyers and investors, which could result in a worse deal for customers that do not check the small print and switch loans at the end of the fixed term.
Terms for the headline rates have been increased from two to three years but the reversionary rate – which is the payments due after the discount period – have been increased.
For example, under the original principal and interest offer, borrowers paid 3.75 per cent fixed for two years before the loan reverted to 4.10 per cent.
Under the new offer, which applies from Tuesday, borrowers pay 3.75 per cent fixed for three years before the loan reverts to 4.19 per cent.