Australia’s banking regulator has announced it will remove a major restriction that has halved interest-only loans since it was implemented.

In March 2017, the Australian Prudential Regulation Authority forced lenders to limit new interest-only lending to 30 per cent of residential home loans being issued.

The interest-only lending restriction was a follow up to a cap on investor lending — which put a 10 per cent limit on bank lending to property investors — with the two measures aimed at significantly improving bank lending standards and reducing higher risk lending.

The measures had a noticeable impact amid banks lifting investor interest rates and requiring bigger deposits — investor presence in the nation’s biggest property markets took a sizeable step backward.

The effect on interest-only loans was immediate: new interest-only loans nosedived well below the cap of 30 per cent to only 16 per cent of new loans issued.

The 10 per cent limit on bank lending to property investors was scrapped in April this year and on Wednesday, APRA chairman Wayne Byres announced the limit on new interest-only lending would also be removed, saying it had “served its purpose”.

“The benchmark on interest-only lending was put in place as a temporary measure in 2017, with the aim of reducing the level of interest-only lending and improving the quality of mortgage portfolios,” he said.

“Since the introduction of the benchmark, the proportion of new interest-only lending has halved, and interest-only lending at high loan-to-valuation ratios has also declined markedly.

“In summary, as with the benchmark on investor loan growth, this measure has served its purpose.”

ANZ head of Australian economics David Plank said the decision was a strong signal from the banking regulator that Australia’s credit tightening had gone far enough.

“I think the immediate impact of this announcement will be minimal in terms of how it will affect investors and the housing market but there’s a signal here in terms of the regulator’s intent,” he said.

“It signals a changing intent on the direction of credit tightening. What it says is they (APRA) don’t want to see it go further … it’s about ensuring there’s not unnecessary tightening of credit.”

Mr Plank said while the timing was possibly connected to the slowdown in Sydney and Melbourne’s property markets, it was more about the slowdown in lending to investors.

“This was always intended to be temporary. It’s not directly related to the weakness in house prices because if we reached a situation where house prices were going up but interest-only loans were down, they still would’ve removed the restriction,” he said.

Domain economist Trent Wiltshire said the figures were a clear sign APRA’s intervention had been successful.

“At their peak, 46 per cent of loans were interest-only. Now they’re down to 16 per cent. It’s clearly worked in terms of bringing down that type of lending,” he said.

But Mr Wiltshire said scrapping the restriction to interest-only loans was unlikely to have an immediate impact on investor demand, mainly because of the cost of money.

“The banks have had the space to increase their interest-only loans if they want to … but they haven’t,” he said.

“This is not just about banks being unwilling to lend — investor appetite for new loans has declined significantly over 2018.

“The investors don’t want to borrow. They see worse prospects for capital gains, sentiment has turned, and the ALP’s negative gearing policy could be weighing on appetite as well.”

He said lower interest rates was more likely the key factor in bringing investors back to the market, rather than removing restrictions.

“What would bring them back? Lower interest rates would help. A change in sentiment. The cash rate is the big one though,” he said.

Market analyst and Propertyology managing director Simon Pressley welcomed the change but said it would mean little to most Australians, who were finding it hard to get a mortgage for family homes.

“Today’s announcement is good from a sentiment point of view, it’s good for Australians to hear about the second relaxation of APRA’s policy tightening in only a few months,” he said.

“But at the end of the day, what the Australian public needs is credit approved for worthy borrowers, the type of credit most people need for family homes.

“The cap on interest-only loans was one of many measures that were an extreme reaction from APRA to a housing boom in Australia’s biggest city that had the highest debts.

“The problem was, these measures were implemented Australia-wide. The world revolves around credit. The minute you make it really hard, you stop some of the most important decisions people make. There’s already been damage done but it’s not too late to intercept things.

“That’s what it boils down to — but I think the fact we’re seeing signs that perhaps things have gone too far, that APRA overreacted, is encouraging.”