ANZ cuts interest and principal loans, hikes interest-only rates

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The logo of the ANZ Banking Group is displayed in the window of a newly opened branch in central Sydney, Australia, Aprl 30, 2016. Reuters/David Gray

ANZ Bank has hiked interest rates on interest-only home loans by 0.3 percentage points and cuts variable interest rates for those paying principal and interest by five basis points to 5.2 percent. The lender gives customers more reasons to shift away from interest-only mortgages as it scraps fees for switching.

The bank said reducing variable rates would benefit 80 percent of its owner-occupier customers who have principal and interest loans. The changes will take into effect starting June 16. The move is expected to apply to both residential and investor loans.

ANZ group executive officer Fred Ohlsson said they are aware the move will disappoint customers paying interest on their loans. But he defended the decision, saying they must manage their regulatory obligations and they are now required to hold additional capital against ANZ’s home loans.

“We also need to better balance our portfolio towards those paying off their homes,” Ohlsson explained. He further stated the decision was not in response to the bank levy and ANZ is still assessing the ultimate impact of the tax.

ANZ's interest-only home loan rates will likely rise to 6.26 percent. The announcement comes following the Reserve Bank of Australia’s decision to keep the cash rate on hold at 1.5 percent.

ANZ previously said it would have to set aside more money against its residential mortgage lending book. The bank expected that the new model from the Australian Prudential Regulation Authority will lessen ANZ’s Level 2 Common Equity Tier-1 ratio by 26 basis points.

In March, the regulator said banks must limit higher risk interest-only loans to 30 percent of new residential mortgages. ANZ declared it would not need to increase any additional capital.

'Responsible borrowing'

Sally Tindall, spokeswoman for financial comparison website RateCity’s, said the changes signalled a move by the bank to “get its customers to pay down their debt and encourage more responsible borrowing.” She told that ten dollar per month might appear like a little change, but it will add up to thousands over the life of the loan. Tindall added the move is another widening of the gap between principal and interest and interest-only as a result of the new cap on interest-only lending.

Based on RateCity calculations, a $300,000 loan for a customer paying principal and interest their monthly repayments will fall from $1657 to $1647 in a span of 30 years. At least $3340 would be saved over the life of the loan in interest costs.

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