APRA responds to broker's defence of interest-only loans

by Julia Corderoy18 Dec 2014
Corporate regulator APRA has responded to a mortgage broker who defended interest-only loans, saying there are “indications of poor lending” in the mortgage market.   

In a letter obtained by Australian Broker last week, Ray Weir, director of Finance Solutions WA, hit back at APRA and ASIC’s crack down on interest-only lending, saying there are many logical – and safe – reasons as to why a borrower takes out an interest-only loan.

APRA has since responded to Weir by letter, saying that although they do not intend to discriminate against interest-only lending in a regulatory or supervisory sense, there are statistical and anecdotal indications of poor lending.

“We are seeing a large increase in interest-only lending, perhaps rather larger than would be warranted by growth in the underlying home loan portfolio,” Charles Littrell, Executive General Manager of the Policy, Statistics and International division at APRA wrote.

“This causes us to worry that some interest-only lending may be driven by borrower aspirations, combined with lender desire for writing new loans, even with risky income serviceability characteristics.”

While the regulator acknowledges lender and ASIC serviceability requirements, Littrell says they need to take a “better safe than sorry” approach to determine whether or not the growth in interest-only lending is based on the sorts of “good debt” Weir mentioned  in his letter.

“The fact remains, however, that there is the potential for some borrowers to secure an interest-only loan in a fashion that over-gears them against their income, and possibly against their collateral,” he wrote. 

“I don’t expect that this will lead to APRA materially restricting interest-only lending, but at the margin we could too easily find that some lenders have become over-enthusiastic.”
 

COMMENTS

  • by Barney 18/12/2014 9:18:12 AM

    Their response tell me that they still don't get it. In most instances these clients have an offset account and so by saving extra they are reducing the principal. They need to factor funds held in off-set account and their profile (accumulation). They also need to understand (re their comments about people with "borrower aspirations") that interest only loans are assessed at the stress rate on a P and I basis over a shorter loan term (factoring the I/O term). Their assumption is that I/O increases your capacity - which is untrue.

  • by Andrew L 18/12/2014 9:47:03 AM

    Barney, you took the words out of my mouth! This is another case of someone not understanding our industry!

  • by Vic Regional Broker 18/12/2014 9:57:04 AM

    This response doesn't tell me anything, not in touch with reality and the response is the stuff of smoke and mirrors.