individual borrowers is non - trivial. for the household sector as a whole, however, the cash flow effect of the transition is likely to be moderate. the effect on household consumption is likely to be even less. this is because some interest - only borrowers 11 / 13 bis central bankers'speeches will be willing and able to refinance their loans. also, many others have built up a sufficient pool of savings, or will be able to redirect their current flow of savings to meet the payments, or have planned for, and will manage, this change in other ways. indeed, the substantial transition away from interest - only loans over the past year has been relatively smooth overall, and is likely to remain so. nevertheless, it is something that we will continue to monitor closely. finally, the observation that the transition is proceeding smoothly is not an argument that the tightening in lending standards on interest - only loans was unwarranted ; far from it. the tightening in standards starting in 2014 has helped to ensure that borrowers are generally well placed to service their loans. and the limit on new interest - only lending more recently has prompted a reduction in the use of those loans during a time of relatively robust growth of employment and still very low interest rates. in this way, it has helped to lessen the risk of a larger adjustment later on in what could be less favourable circumstances. 1 this can be true even for investors today since ( over a relatively long horizon ) the benefit of the tax deduction can offset the cost of paying the higher interest rate on interest - only loans that now apply. also, if the investor has attractive alternative investments, they may be willing to pay more for an interest - only loan. 2 the term ‘ bank ’ here refers to all authorised deposit - taking institutions, namely banks, building societies and credit unions, which are regulated by apra. 3 investors are sometimes given a clear option to extend into a second interest - only period, but that would normally proceed only after ascertaining that the borrower ’ s financial position remains sound. 4 for more discussion of the risks associated with interest - only loans, see rba ( reserve bank of australia ) ( 2017 ), financial stability review, april. 5 strictly speaking, apra imposed a 10 per cent benchmark on investor lending growth. if a lender breached that growth it would face higher capital charges and more scrutiny from apra. 6 for details, see apra ( 2017 )

7 3 / 13 bis central bankers'speeches the higher interest rates contributed to a reduction in the demand for new interest - only loans. in addition, because banks had raised interest rates on all of their ( variable rate ) interest - only loans, existing customers had an incentive to switch their loans from interest - only to p & i terms before their scheduled interest - only periods ended. many took up that option. 8 the combination of higher interest rates and tighter lending standards contributed to the share of new loans that are interest - only falling comfortably below the 30 per cent limit. the stock of interest - only loans in total housing credit has also declined noticeably, from close to 40 per cent to almost 30 per cent. this reduction in the stock of interest - only loans over the past year was substantial. it represented about $ 75 billion of loans ( out of a total stock of interest - only loans of almost $ 600 billion in late 2016 ). while many of the customers switching chose to do so in response to the higher rates on interest - only loans, there are likely to have been some borrowers who had less choice in the matter. some borrowers may have preferred to extend their interest - only periods but may not have qualified in light of the tighter lending standards. we don ’ t have a good sense of the split between those borrowers that switched voluntarily and those that switched reluctantly. however, our liaison with the banks suggests that most borrowers have managed the transition reasonably well. also, the share of non - performing housing loans over the past year remains little changed at relatively low levels. moreover, the growth of household consumption has been sustained ; indeed it picked up a touch in year ended - terms over 2017. given the large number of borrowers switching to p & i loans, it ’ s not surprising that scheduled housing loan repayments have increased over the past year ( graph 3 ). meanwhile, unscheduled payments have declined. with total payments little changed, the rise in scheduled payments has had no obvious implications for household consumption. 4 / 13 bis central bankers'speeches the next few years so, many interest - only borrowers appear to have responded voluntarily to the pricing incentives and switched to p & i loans. this means that it is possible that the current pool of interest - only borrowers is a little more likely than usual to want to continue with their interest - only loans. for some of these borrowers, the decision not to switch to a lower interest rate p & i