The Aussie home loan dream ... interest-only loans are a way into the market for some, but financial regulators are clamping down on them. Source: News Limited

The attempt by the Australian Prudential Regulation Authority (APRA) to put the microscope on interest-only loans for both owner occupiers and investors has infuriated the industry.

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It came just days after the handing down of David Murray’s financial system inquiry and also follows record high levels of interest-only loans recorded in the September quarter.

Mortgage Choice chief executive officer Michael Russell said regulators needed to be “very, very careful” in their move to restrict interest-only loans.

“I’m not sure why that personal decision (to have an interest-only loan) is being mooted to be taken away from them,’’ he said.

“I don’t think now is the time that we should be receiving any regulator interference in an attempt to cool down housing demand.

“We are in the process of transitioning from mining investment to retail and housing construction which we need to remain a strong contributor to GDP and employment.”

Mr Russell said house prices were already “starting to cool” in the last six to seven months.

Warning to regulators ... Michael Russell of Mortgage Choice. Source: News Limited

Questioning ASIC ... Australian Bankers Association CEO Steven Munchenberg. Source: Supplied

At the same time unemployment levels jumped to a 12-year high this week to 6.3 per cent.

Interest-only loans are most commonly used by investors who make “interest-only” payments on the loan and fail to chip away at the principal, instead relying on capital growth.

APRA contacted banks earlier this week and stated that the growth in loans to property investors should not exceed 10 per cent.

The Australian Securities and Investments Commission also highlighted that it was keeping a close eye on interest-only loans.

But the Australian Bankers’ Association chief executive officer Steven Munchenberg said the move by both APRA and ASIC should be taken with extreme caution.

“I’m not quite sure why ASIC have bought into this debate unless there are suggestions that these loans have been offered inappropriately,’’ Mr Munchenberg said.

“We do need to be careful that any interaction doesn’t result in those (property) markets overcorrecting.”

Mr Russell said some financial institutions allowed interest-only loans to stretch out to 15 years but borrowers are assessed on their ability to make both principal and interest repayments when taking out a loan.

Reserve Bank of Australia figures show in the September quarter of new owner-occupier loans, 31 per cent were interest-only loans, while for investors it equated to 64 per cent of all new loans.

They said lenders should use a two per cent interest rate buffer and a “floor” lending rate of seven per cent when determining whether borrowers can service their loans.