ASIC releases its review of interest-only home loans

by AB11 Oct 2017

ASIC's review of interest-only lending has revealed that borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender.

The review, which was announced in April 2017, was a targeted industry surveillance examining whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans.

ASIC has concluded the first stage of its targeted review, which involved data collection from 16 home loan providers (including large banks, mid-tier and smaller banks, and non-bank lenders).

ASIC found that Australia's major banks have cut back their interest-only lending by $4.5bn over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending.

The 16 lenders reviewed by ASIC provided $14.3bn in interest-only loans to owner-occupiers in the June 2017 quarter, down from $19bn in the September 2015 quarter.

ASIC's interest-only lending review has also found:

  • Borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender
  • Borrowers approaching retirement age continue to be provided with a  significant number of  interest-only owner-occupier loans

ASIC has now moved into the second stage of its review, and will be reviewing individual loan files from both lenders and mortgage brokers. These lenders and mortgage brokers have been selected based on a number of criteria, including their relative share of interest-only home lending.

ASIC will examine individual loan files to ensure that lenders are providing interest-only home loans in appropriate circumstances. ASIC will carefully review cases where owner-occupiers have been provided with more expensive interest-only home loans, to ensure that consumers are not paying for more expensive products that are unsuitable.

Under the responsible lending obligations, lenders and brokers are required to make sure that a loan meets the requirements and objectives of a consumer, in addition to making sure that the loan is affordable. Lenders and brokers must have a reasonable basis for suggesting that a consumer apply for a particular loan product, and no consumer should be surprised by the type of home loan product that they have obtained. 

In providing the update, ASIC deputy chair Peter Kell said he expected lenders offering these types of loans to be making thorough enquiries into the financial status and the needs of their clients:

"The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations," he said.

"While interest-only loans may be a reasonable option for some borrowers, lenders must make appropriate enquiries into the needs and financial circumstances of their customers, and they must be able to demonstrate that they have done so."

ASIC will consider appropriate enforcement action if breaches of the law are identified.

Background

ASIC collected data from the following lenders covering their interest-only lending activities over the last two years:

  • Australia and New Zealand Banking Group
  • Australian Central Credit Union (trading as People's Choice Credit Union)
  • Bank of Queensland
  • Bendigo and Adelaide Bank
  • Citigroup
  • Commonwealth Bank of Australia
  • ING Bank (Australia)
  • La Trobe Financial Services
  • Liberty Financial
  • Macquarie Bank
  • ME Bank
  • National Australia Bank
  • Pepper Group
  • Suncorp
  • Teachers Mutual Bank
  • Westpac

COMMENTS

  • by David 11/10/2017 10:18:55 AM

    "More expensive interest only loans" - sorry APRA but they weren't more expensive until you stuck your head in and forced the rates up for interest only loans.

  • by Dane 11/10/2017 10:25:33 AM

    Are broker more likely to have written interest only loans because brokers are more likely to recomend their clients discuss the implications of buying an investment property with their accountant first, who then give advise to apply for an interest only facility based on their financial situation?

  • by RH 11/10/2017 10:37:18 AM

    Interest only loans have a place in lending. Any accountant will recommend interest only repayments on investment loans to maximise the negative gearing benefits of the interest for tax purposes. If the client has an owner occupied home loan then it would be prudent for this to be switched to principal & interest repayments. First Home Buyers appreciate having interest only loans initially as they are asked to provide minimal interest payments to the lender thus freeing up much needed to cash to purchase furniture, appliances etc in their new home rather than taking more expensive personal loans/store finance. Having seen some of the recommendations (and incorrect information) provided to clients by inexperienced loan staff I am not surprised that the lenders are reportedly doing more P&I loans as many of these lenders have little or no experience in the respective benefits of interest only loans. Please also remember that clients are able at any time (unless loan is fixed) to switch to P&I repayments. We are not licenced to given accounting advice so the client should seek this type of advice if considering interest only.