It said it made the move as investors continued to dominate the housing market.
Interest-only terms are popular with property investors, who usually focus on paying down the mortgage on their own homes first.
Reserve Bank figures released late last month show more than 40% of new mortgages by value are interest only and in Auckland 47% of the lending in May was to investors. The move by Westpac follows the bank’s decision last month to stop lending to offshore-based investors.
Simon Power, GM Consumer Bank and Wealth, said the reduced term for interest only home loans was to provide customers with a checkpoint at the end of the interest-only period to assess if they were still comfortable with and able to meet their obligations.
“With the way market conditions are we see this as a prudent and timely move. The last thing we want is for customers to overstretch and get into difficulty while interest rates are at historic lows,” Power said.
“This gives the customer the opportunity to reassess their needs and financial situation.”
The move brings Westpac into line with BNZ and ASB.
A BNZ spokeswoman said: "We continually review all our lending criteria including our interest-only polices. As highlighted in recently published RBNZ data, we note the overall market proportion of new interest-only lending is at 41% – BNZ’s proportion of interest-only lending is significantly lower than this. Our current policy is to allow interest-only lending to a maximum term of five years. However, under special circumstances by exception we may allow up to a term of ten years.
