But Mr Hartzer assured analysts during the results presentation that the bank does not expect "a big drop in house prices".

Westpac's annual results reveal just how much the world of mortgage lending has changed for the big four banks in the wake of macroprudential curbs on investor lending and more recently the banking royal commission.

Interest only loans now comprise 35 per cent of Westpac's portfolio, compared to 40 per cent in its 2018 first half. A year ago the proportion was 46 per cent.

In the second half, Australian housing loans increased $7.5 billion or 2 per cent which was below system growth.

"We expect house prices to cool further, and investor demand to remain weak": Brian Hartzer. Peter Rae

Owner occupied housing balances grew 3 per cent to now comprise 57 per cent of Westpac's lending portfolio. That proportion is a moderate increase on the 56 per cent recorded six months earlier, which held steady from a year ago.

Westpac is managing to hold growth in interest-only loans below the macroprudential limit of 30 per cent of new flows, with new interest-only facilities representing 23 per cent of new mortgage limits for its second half.

Its customers have switched $15.9 billion of interest only loans to principal and interest during that period.


"The operating environment for financial services has been more challenging," the bank said in its annual report.

"In particular, findings from the Royal Commission have contributed to a deterioration in sentiment towards the sector while credit growth has eased by around 1 percentage point to 4.5 per cent from both a moderation in the housing market and the full period impact of macroprudential rules on lending."

Over the full year, the bank's Australian housing loans increased $17.6 billion or 4 per cent, which is slightly below system growth.

Owner occupied loans increased 6 per cent over the year. The bank's investor property lending grew by 2 per cent.

Principal and interest loan flows represented 77 per cent of all new flows and now comprise 61 per cent of the portfolio. A year earlier such loans accounted for 50 per cent of the book.

Westpac also noted that a decline in mortgage spreads was due to its customers switching from interest only to principal and interest, along with changes in portfolio mix towards lower margin products and lower rates on new mortgages.