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Brokers responsible for more than half of interest-only lending, ASIC reveals

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Julia Corderoy | 18 Dec 2015, 08:15 AM Agree 0
More than half of interest-only loans come through the third party channel, ASIC has revealed ahead of its forthcoming review of mortgage brokers
  • Chappo | 18 Dec 2015, 08:44 AM Agree 0
    More breaking news "Survey shows 100% of Interest Only loans approved and funded by lenders".

    Is it maybe because brokers are giving borrowers sound advice on loan structuring?

    Note to ASIC, APRA, RBA, ATO and NKOTB, you need to show you CAN afford P&I to borrow the money, you then chose how to structure the loan/s.
  • Robert H | 18 Dec 2015, 09:00 AM Agree 0
    ASIC views interest only loans as a risk?? A risk to what?? Doesn't it make sense for 1st home buyers to structure their loans interest only so they make minimum payments to the Bank initially and have a little extra cash available to buy furniture, carry out repairs/renovations etc in those initial years. They would then start principal repayments at the expiration of the interest only period at which time you would expect them to have higher incomes. In relation to interest only on investment loans doesn't it make good sense for negative gearing purposes to keep the debt high and use extra funds to repay personal debt? Maybe this is the issue?? Maybe the ATO wants to reduce the negative gearing benefits to investors? Maybe we need a broker in ASIC that can actually explain the real world.
  • Ken Crawford | 18 Dec 2015, 09:18 AM Agree 0
    Maybe the reason brokers write more interest only loans is that they follow the KYC process more closely and find out more about the requirements of the borrower. The superior experience of the brokers over the younger, less experienced bank loan staff would suggest that they are more in tune with the needs of the borrowers and know what questions to ask rather than dictating to borrowers what loans are to be taken and what structures are available.
  • Balanced | 18 Dec 2015, 09:25 AM Agree 0
    So if over half the loans written are through the broker channel, wouldn't you expect that over half the interest only loans will be also.
  • Broker | 18 Dec 2015, 09:40 AM Agree 0
    Where's the bit that says that says that interest only loans are also easier to get approved!?

    This statistic and that's all it is, more than likely means that Brokers structure loans to better suit the clients needs, not the banks or ASICs.

    Reducing your loan balance by 1-2% annually has meant very little anyway, when compared to the net equity position in most properties due to rising values, but I suspect that ASIC wouldn't get that, would they?
  • Paul Brown, Nth Adelaide | 18 Dec 2015, 09:45 AM Agree 0
    Context? Are we talking about interest only home loans? In which case, Yes, that's a shocking statistic.

    If we are talking about investment home loans then clients seek out brokers for assistance and advice. Generally that advice is to speak to your accountant about interest only vs P&I. Invariably the accountant recommends IO.

    I can't see any justification for having your entire home loan on IO long-term and would recommend a line of credit be kept to a minimum.
  • Dave Robinson | 18 Dec 2015, 09:46 AM Agree 0
    Well that would be right wouldn't it, brokers write over half the loans. It has been reported on several occasions that investment borrowers use brokers more than other borrowers. At best this sounds like an excuse at worst it would appear ASIC does not understand the finance market. Am I missing something here?
  • Steve McClure | 18 Dec 2015, 09:58 AM Agree 0
    The legislation demands that under the advice model, a broker must assesses a borrower's situation, taking into account their individual circumstances to determine a suitable loan. We can't just apply a one size fits all approach.

    BUT, that's exactly what APRA and ASIC are doing. Applying broad-brush statistics across lenders, without proper consideration of consumer's individual needs. The outcome has been the burden of higher rates and restricted lending practices that have seen borrowers default on previously exchanged contracts. I'm failing to see a win yet for the consumer.

    The regulators are preoccupied with general statistics to the detriment of the individual.
  • QEDRisk | 18 Dec 2015, 09:59 AM Agree 0
    Why are we hearing this meaningless statistic AGAIN?? I have had the conversation with Mr Saadat in the past that it is a meaningless statistic and therefore pointless to keep wheeling it out - and yet here it is AGAIN.

    ASIC's earlier report, which started this statistic, quotes the number at 55%.

    Well - 55% is the proportion of ALL loans that are written through the 3rd party channel.

    So ASIC should also be telling us that the "majority of P&I loans are written through the 3rd party channel" but that just wouldn't make a headline would it!!?
  • Wozza | 18 Dec 2015, 10:07 AM Agree 0
    Yep we write 50% of the interest only loans. Don't we also write 50% of the total loans ? Why is this newsworthy and why is ASIC investigating it? Waste of time and money.
  • Broke Broker | 18 Dec 2015, 10:38 AM Agree 0
    I agree with most of these comments. ASIC are now accountants it appears. Perhaps they want to takeover the ATO whilst they are at it and investigate them for allowing mum and dad investors to flourish and grow their wealth. Regulation is important ASIC however no need to go the extra step if it isn't broken and manufacture a problem that isn't there.
  • Regional Broker | 18 Dec 2015, 10:47 AM Agree 0
    Oh please, has anyone though this may be because brokers are dealing with a lot more construction loan than sales staff at banks?

    Brokers are better at determining loans that are "NOT UNSUITABLE" for investors.

    Really this is ASIC again showing they do not really understand a mortgage brokers role. Plenty of work to be done by the MFAA lobbyists and FBAA!
  • MMW | 18 Dec 2015, 10:49 AM Agree 0
    “One of the findings of our review of lenders’ files was that record keeping practices were not as good as they could be, so we are quite interested to see how brokers are going with record keeping as well.”

    So what is ASIC doing about the poor record keeping of the lenders? Any lenders & their employees who failed in record keeping been fined?

    First of all, having worked in the banks prior to working for myself, there is no requirement for the lenders to complete a client needs analysis, preliminary assessment or disclose the profit the bank will make on the loan.
    We brokers on the other hand have to complete this process as part of compliance.

    Will ASIC publish the positive outcomes of their review on how well brokers understand their clients and why they arrange interest only loans?

    That would be meaningful instead of just highlighting the number of interest only loans and then to add a quiet qualifier that the TOTAL VALUE of the interest only loans by brokers are LOWER than those written by the lenders themselves.

    This means there is a LOWER RISK of interest only loans exposure written by brokers.

    Will ASIC review to understand WHY?

    That is because we take the time to structure loans to MEET our CLIENTS NEEDS.

    The common structure used for owner occupied loans is to split the total loan amount into two loan accounts with interest only for one account and P&I repayment for the other.

    This will result in higher number of interest only loans but it will be lower in value due to the split.

    It is more work for a broker to write the loan application but it gives flexibility to the clients and reduces their overall debt over the five years as only a portion of their debt is on interest only repayment arrangements.

    I expect the reason the lenders loans are higher in value but lower in number of interest only loans is because the lenders employees write the whole loan amount on interest only repayments.

    If ASIC wants to really review on risk, the lenders' interest only loans are riskier as the whole loan is interest only and the owner occupiers debt level remains the same for the full five years of interest only repayment term.
  • Aged Broker | 18 Dec 2015, 11:35 AM Agree 0
    When are MFAA and FBAA going to open their tight lipped mouths and start supporting those of us that pay their salaries?
    It is time these two industry bodies started to respond to the government bureucratic bullies that seem intent on making brokers lives a misery. C'mon both of you, stand up and open your mouths, for all our sakes.
  • QEDRisk | 18 Dec 2015, 12:06 PM Agree 0
    Why are we hearing this meaningless statistic AGAIN?? I have had the conversation with Mr Saadat in the past that it is a meaningless statistic and therefore pointless to keep wheeling it out - and yet here it is AGAIN.

    ASIC's earlier report, which started this statistic, quotes the number at 55%.

    Well - 55% is the proportion of ALL loans that are written through the 3rd party channel.

    So ASIC should also be telling us that the "majority of P&I loans are written through the 3rd party channel" but that just wouldn't make a headline would it!!?
  • GC | 18 Dec 2015, 04:46 PM Agree 0
    Why do ASIC think they have the right to determine the loan structure the client wants? When did these idiots at ASIC put themselves at the finance gods of Australia. Do they really think they have the right? They have admitted they dont understand the industry so how can they make valid judgements over something they have clearly demonstrated a severe ineptitude.

    Its about time the GOVT stepped in put this shit to bed. It has gone beyond a joke.
  • Rocket Scientist | 18 Dec 2015, 05:00 PM Agree 0
    It sounds like IO loans have joined forces with ISIL and everyone is against them.

    I don't see why ASIC are trying to weed out these loans as if they were some extreme Jihadist. I Like em!

    I think they're great if used responsibly and I am surprised that it's only ~50%

    Again, I've posed this question in numerous other forums - has ASIC ever done a study with the number of IO loans which are linked to offset a/cs and detailed the level of savings offsetting the loan? I've yet to see this.
  • john curry | 22 Dec 2015, 10:26 AM Agree 0
    I have been involved in lending and broking since 1975.
    The topic of interest-only has always been an option, but not recommended for the average home loan. However, as most of us know is applied for investment lending where the client has home loan debt.

    I have been structuring loans for the clients best scenario and the major aim is to get the home loan paid as fast as possible. As most of us know, the regulatory authority excluded, we structure loans to achieve the previous mentioned result.

    One method is to structure the loan as interest-only with the initial term of 5 years, this will add flexibility and also give roll over reviews. Note that the qualifying rate is above 7% and with interest only the loan is harder to service as the term is reduced to a 25 year term. We show the client the repayment amounts at 7% interest-only and principal-and-interest and also the current rates. Our recommendation is always the P&I option and to pay the maximum amount possible.

    However with this structure they have total flexibility to pay the amounts that best fits their budgets from time to time. Some other methods will include salary credit direct to the loan, off set facility, avoid the annual fee, have a fee free account included in the structure and so on. These structures may not suit all scenarios.

    But the along come the regulators, clearly ignorant of the previous mentioned structures, as we know they and their actions have forced rates up. This will actually diminish the long term benefit of the loan structure and expose the client possible loss?

    I am sure most of us are aware of these structures, BUT ARE THE REGULATORS?
  • SEQ BROKER | 22 Dec 2015, 10:40 AM Agree 0
    Sounds like an excuse to invade more brokers files. The comment around notes is particularly concerning. The fact find represents about a hundred direct questions to a client and whats more the information is...wait for it.. noted. Will ASIC admit that they are simply looking for an entry portal to make investigations, because they are biased against brokers, and that they wont treat the big 4 the same way in a million years. This spanks of discrimination folks.
  • Papery | 11 Jan 2016, 02:34 PM Agree 0
    For every broker file that gets picked up, a similar branch & a direct online file should also get picked up. Then well see whose notes & due diligence is better.

    Maybe as brokers we can put forward the deals that as brokers we couldn't do but somehow the branch was able to.
  • Graeme | 26 Mar 2016, 08:08 PM Agree 0
    Investment properties should always be second in line to the client's owner occupied property.
    While the rates are low I think it's a great idea to make minimum IO payments to the investments and free up all the cashflow to pay off the owner occupier much faster!
    They are only investments at the end of the day and there's no place like home, right?
    Obviously this is just a tactic and might not suit every client's strategy!
    Good ole APRA trying to end negative gearing
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