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Broker hits back at regulator crack down on interest-only loans

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Julia Corderoy | 11 Dec 2014, 08:19 AM Agree 0
A broker has confronted both ASIC and APRA in defence of interest-only loans, after both regulators expressed concern over the rise in these types of home loans
  • Marko | 11 Dec 2014, 09:03 AM Agree 0
    Ray is quite right with his commentary. However these types of loans are in the minority and do not account for the rapid growth of interest only loans for owner occupiers.

    The risk is that these loans are being mis-sold to vulnerable borrowers. Consider the following scenario:
    1. Borrower takes out an interest only owner occupied loan at 90% LVR for 3 years.
    2. Rate is fixed for 3 years.
    3. At the end of three years the loan rate reverts to the prevailing variable rate, which has risen by 3% in the 3 year period.
    4. At the same time the borrower is now required to repay principle and interest.
    5. The borrower cannot afford the P&I repayments at the higher rate and seeks to refinance. However in the three year period property values have fallen by 10% and his LVR is now 100%. He cannot secure refinance for this reason and also because he cannot demonstrate his capacity to repay. The only way out is to sell the property at a loss.

    All of these conditions (increasing interest rates, falling property values) are very possible in the next 4 years in many markets.

    This exact scenario played out in the UK a few years ago with the result that lenders had billions of pounds in mortgages set aside by the regulator.

    Imagine the response of FOS, COSL or ASIC to a complaint by the borrower that the loan was unsuitable for them.

    Lenders test serviceability at a stress rate, yes and many also use the P&I repayment in their serviceability calculations. But we all know that most people will adjust their lifestyle to their surplus income and a repayment shock such as in the above scenario often leads to mortgage stress.
  • AF | 11 Dec 2014, 09:29 AM Agree 0
    Interest only loans for investors, especially those with non deductible debt is just good planning. This country is being dictated to by a public sector that is anti self sufficiency, anti innovation, in fact anti wealth accumulation. Why? Because they sit on their fat guaranteed salaries, guaranteed excessive superannuation benefits & have a total lack of understanding outside the PAYG regime. Governments are also to blame e.g. the FHOG qualification criteria. The only requirement to qualify for the various FHOG grants is to occupy the property for 6 of the first 12 months. Would this tempt any potential investors I wonder?
    If we allow ASIC & APRA to have their way, they will be the last ones left to turn out the lights. Perhaps they haven't given much thought to the fact that if they over regulate, there will be less wealth creation, less jobs, less tax & no money to pay their fat wages. Don't we still live in a democracy where freedom of choice still applies?
  • Tom | 11 Dec 2014, 09:50 AM Agree 0
    Sorry Marko, but I disagree. I sell quite a lot of Interest Only loans to Owner Occupiers, and it goes hand in hand with an Offset Account.

    If their salaries are directed into the Offset Account the balance should accumulate over the Interest Only period, just as it would if they were paying P&I.

    If however, their savings or lack thereof indicate they have trouble saving, then I use P&I to ensure they are getting ahead.

    It is a flexible solution tailored to each individual client - what suits and works for one, may not for another.

    That's our job - to structure appropriately for each individual clients circumstances and needs.

    That is what I classify as looking after the client, ASIC & APRA need to pull their head out of the sand, and stop trying to dictate a one solution fits all approach!
  • MCC | 11 Dec 2014, 09:58 AM Agree 0
    Good comments Ray - Well done! Just remember that as credit advisers we look at specific needs of the individuals & as long as we properly assess needs & objectives we are doing our job. It's the role & job of the regulators to assess 'systemic risk' & you don't have to be 'Albert Einstein' to guess the state of your country's financial system without appropriate checks & balances in place. Pendulum swing.
  • TJ (Ballarat) | 11 Dec 2014, 10:21 AM Agree 0
    That's a fairly pessimistic view you are taking there Marko! Reminds me of a senior credit assessor I used to work with in a major bank who would always look for some implausible unlikely event to decline a loan rather than approve one. If we all took such a negative approach, our country would stagnate. Look forward, not backward. Look up, not down. Perhaps the borrower you mention should not have entered in to such a transaction without the ability to repay if a few rate rises occurred. Why do we look to blame others all the time without taking responsibilities for our own actions ("vulnerable borrowers" pffft). People need to have a plan B. As a broker, I would certainly advise someone who took an interest only loan fixed for three years, that after the initial period they were going to need to make P & I payments over the remaining 27, and that they should ensure they have the ability to do this factoring in possible higher rates!!
  • RC | 11 Dec 2014, 10:30 AM Agree 0
    Ray, spot on. That is our role, to assist & a advise in the best possible manner, and your logic on loan scenario's would be very much how I would work it if presented with those deals.
    Marko, don't necessarily disagree with what you say, but I am cautious about high LVR loans & in 14 plus years as a Broker I have never done a 100% loan! & only probably three 90% LVR loans, based on the strength of the applicants income & job stability.
    I am not in the business to purely do a loan because it is there. If it is not right for the client or I have concerns I will state this and try And give some advice in building up a deposit structure or ideas to work with, and happy to talk to them further when in a position to do something. I am not out to work for nothing by doing a deal for he sake of getting a commission payment to have it clawed back off me and see someone loss there home.
    ASIC & APRA are strutting around at the right time of the year. Only issue being A Turkey at this time of the year they could end up on a plate. That would be a real shame.
    Probably the investor or home-owner that has diligently structured an Interest only loan will have the benefit of being able to afford his turkey & ham.
  • Joe | 11 Dec 2014, 10:34 AM Agree 0
    Generally I agree with the strategy, however as a word of caution, I'm sure that the ATO will be carefully reviewing borrowers who structure their affairs to use surplus income from Interest Only property Investment Loans to redirect these funds to say their Non Tax Deductible Home Loans.
  • Well informed | 11 Dec 2014, 10:40 AM Agree 0
    I disagree entirely with Marko. Your scenario as presented is incomplete. You have not given a rationale for the borrower wanting an owner occupied loan, interest only x 3 years. This is the key. As a quality Broker, I would be questioning the clients reasons for this request and advise against it unless there were good reasons. A good reason might be that borrowers have a 2 year old baby, and wife plans to return to full time work in 3 years time. Borrower might have a HECS debt, car loan or other commitments, scheduled to end in 3 years time.. Borrower might be completing his apprenticeship, expecting to increase his income markedly when fully qualified.....
    I agree with all of Ray's comments - what a great job of explaining some of the true facts. I also wonder if non collateralised, split loans, for 20% plus costs contributions on investment property purchases (but secured by owner occupied property/equity), is contributing to the increase in o/o interest only loans??? We know investment purchases have been on the upswing - and investors will often use this sort of structure... This might help explain the spike. BTW - interest only for 80% secured on the investment + interest only on the 20% plus costs, secured by the home, is entirely appropriate if the borrower has any home loan debt.. I would consider and borrower/broker/loan officer that does anything different in these circumstances - to be foolish..!
  • Edward Tong | 11 Dec 2014, 10:40 AM Agree 0
    Elegant and articulate work Ray.

    When I was a kid I could ride my bicycle down the street to buy some milk without a helmet.

    Let’s step back for a second and consider the big picture.

    Stop and ask yourselves at what age does a human earn the right to make their own choices? Choices that they will learn from? I've learnt my biggest life lessons from my mistakes. Yes my mistakes, I own my mistakes, I made them myself, they are mine.

    There's a line in "Finding Nemo" where Nemo's dad says, "I will never let anything happen to you, Nemo" There's a double meaning there.
    The lesson. You can't bubble wrap your children's lives and you shouldn’t try. When you empower someone to take responsibility and think for themselves then and only then can they live the life they were supposed to lead. Their life.

    Don’t bubble wrap your kids and don’t bubble wrap anyone else’s.

    As a society I agree that we must protect those that can't protect themselves but we must find the correct balance, but the balance should be where the majority have the freedom to make their own choices.

    If a client needs to cash out or choose interest only or fixed and they are an adult and they can prove that they have been good managers of their financial affairs then why would we stop them. Why? Most of my clients choose interest only and I have never had a client foreclosed upon in 13 years as a broker.

    I encourage you all to consider the society we create when we have the courage to empower citizens to make their own choices and the generosity to allow them to own their choices.
  • Edward Tong | 11 Dec 2014, 10:48 AM Agree 0
    Elegant and articulate work Ray.

    When I was a kid I could ride my bicycle down the street to buy some milk without a helmet.

    Let’s step back for a second and consider the big picture.

    Stop and ask yourselves at what age does a human earn the right to make their own choices? Choices that they will learn from? I've learnt my biggest life lessons from my mistakes. Yes my mistakes, I own my mistakes, I made them myself, they are mine.

    There's a line in "Finding Nemo" where Nemo's dad says, "I will never let anything happen to you, Nemo" There's a double meaning there.
    The lesson. You can't bubble wrap your children's lives and you shouldn’t try. When you empower someone to take responsibility and think for themselves then and only then can they live the life they were supposed to lead. Their life.

    Don’t bubble wrap your kids and don’t bubble wrap anyone else’s.

    As a society I agree that we must protect those that can't protect themselves but we must find the correct balance, but the balance should be where the majority have the freedom to make their own choices.

    If a client needs to cash out or choose interest only or fixed and they are an adult and they can prove that they have been good managers of their financial affairs then why would we stop them. Why? Most of my clients choose interest only and I have never had a client foreclosed upon in 13 years as a broker.

    I encourage you all to consider the society we create when we have the courage to empower citizens to make their own choices and the generosity to allow them to own their choices.
  • Bottom Line | 11 Dec 2014, 11:19 AM Agree 0
    These government organisations know what's best for us - even though they've never lent, and will enforce the decisions we the consumer need to have made for our own benefit, because we shouldn't be able to make decisions for ourselves or we might stuff it up....oh hell....I've just described communism.
  • MCC | 11 Dec 2014, 11:41 AM Agree 0
    Bottom Line - Would suggest you do two things:-
    - refrain from 'sweeping statements' as I'm sure there are individuals within the said Gov't bodies that have a plethora of lending skills & background.
    - secondly the Gov't is a representation of it's people. It is you & I, not some separate entity.
  • The Sage | 11 Dec 2014, 12:02 PM Agree 0
    MCC, can I have some of those drugs you're on!

    You are assuming they have skills and competency, surely you jest ??!!
  • Barney | 11 Dec 2014, 01:02 PM Agree 0
    The assessment of interest only is incomplete until the government also assess the net wealth held in the offset account. We often do interest only loans for owner occupiers. Clients have greater flexibility and are accumulating funds in their offset account. Which has the same effect of course as reducing principal. The other key point suggesting that these loans carry greater risk is that the lenders assess them as P and I for servicing over a smaller P and I term (taking into account the interest only period)... They also said the loans should be assessed at 7%? Huh? They are anyway! (at least)..
  • Rocket Scientist | 11 Dec 2014, 03:14 PM Agree 0
    With the invention of offset accounts there is only one reason why somebody wouldn't elect interest only payments... and that's if they are spenders and cannot manage to accumulate surplus income... In every other case I'd say IO is better. In most cases I'd say it is more prudent to choose IO pmts because it allows the borrower to build a bigger cash buffer quicker. Incidently there is nothing stopping borrowers making principle repayments but they can do so on their terms as/when it suits..
    I'm comfortable with this stance and happy for APRA or ASIC to come knocking.

    Absolutely agree with Tom on 11/12/2014 9:50:46 AM
  • MCC | 11 Dec 2014, 09:36 PM Agree 0
    The Sage,

    I know this will sound pompous & I really tried to refrain from response but... It just annoys the hell out of me when people make statements that are not supported by factual evidence or simply show a lack of ability to consider 'the big picture' & that's why I responded to 'bottom line' on the sweeping statement. EG. I believe Mr Murray may now be involved with one of the regulators, & I'm guessing he has no credit analysis experience as advised by 'bottom line' (rhetorical & facetious comment)? I reiterate, regulators perform a role that is concerned with SYSTEMIC risk! They are highlighting macro risk , if you like , where a combination of a low interest rate environment, stubbornly high underemployment, & inflated asset values have the potential to evolve into the 'perfect storm' .The way we perform our jobs with quality assurance is a given, & this is not in question!!!
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