News: NAB UPDATE 1-Australian bank regulator to remove limit on interest-only mortgages

(Adds market context, quote from APRA letter)

SYDNEY, Dec 19 (Reuters) - Australia's banking regulator said on Wednesday it was removing a limit on the amount of interest-only residential property loans that institutions could issue as the curbs had achieved their objective of slowing higher-risk lending practices.

The Australian Prudential Regulation Authority (APRA) said it would remove the cap on Jan. 1 after it "led to a marked reduction in the proportion of new interest-only lending, which is now significantly below the 30 percent threshold".

APRA introduced the limit in March 2017 amid concerns about a housing bubble. Residential property prices in Australia's major cities have since fallen the most in three decades.

At their peak, interest-only loans accounted for 40 percent of all mortgages. But the loans carry more risks than common principal and payment mortgages, leading regulators to tighten standards on such lending.

As a result, banks have raised rates on interest-only loans, prompting concerns about heightened pressure on borrowers.

APRA chairman Wayne Byres wrote in a letter, published on the APRA website, that most lenders have given assurances that they have tightened their lending standards and that the authority would review their internal risk controls in 2019.

"We will also continue to monitor closely conditions in the housing market more generally," he wrote.

"A re-acceleration in interest-only lending at an industry-wide level would raise systemic concerns."