Interest-only loans could lead to "debt trap"

by Miklos Bolza03 Nov 2016
On average, only 43% of households with interest-only loans have had an explicit discussion with lenders on plans to repay the capital amount.
 
This figure comes from the latest analysis by Martin North, founder of Digital Finance Analytics (DFA), and shows that interest-only policies set out by the Australian Prudential Regulation Authority (APRA) are not being applied across the board.

North said that interest-only loans could become a "debt trap" as many hoped to simply pay the loan out by selling the property at a higher price in future, selling another property or from another source such as inheritence. A shocking 83% of existing loan holders plan on rolling over to another interest-only loan in the future while 26% have no firm plans on how to repay the capital.

Whether or not borrowers were discussing their repayment plans for interest-only loans depended on the loan provider, North found. The best providers initiated this conversation more than 90% of the time while the worst were talking to clients less than 20% of the time. 
 
As for where the responsibility lies for instigating this type of conversation, Peita Davis, owner of Choice Home Loans Penrith & Blue Mountains, put the onus on brokers – as sellers of lending products – as well as the borrowers themselves.
 
“The lender isn’t given the opportunity to have an open discussion around that,” she told Australian Broker. “So I do think it lies within the broker’s capacity to ensure that they are educating their clients properly on the products they are purchasing from the lender.”
 
As few borrowers fully read through the PDF documents sent directly from the lender, the individual selling the product – whether through a branch or broker – is responsible for starting a conversation around what having an interest-only loan means, she said.
 
“But then I believe that the borrower should take some sense of ownership and responsibility around their own financial situation. They should have an open discussion with the lender or broker around what their intention is and the length of time they have to repay their mortgage.”
 
Davis pointed towards society in general which she said had taken personal responsibility from people about managing their own decision-making processes.
 
“I think that that’s where it’s important to have an open conversation in which there’s no directive given from the broker,” she said. Rather the end result should be to educate the borrower of the precise interest-only term and to discuss the intentions and strategies for paying off the loan beyond that term.
 
As for following up with and assessing the client’s future needs once the interest-only period expires, Davis said this was “entirely” the broker’s responsibility.
 
“It’s a perfect opportunity to have a conversation with their clients,” she told Australian Broker. In fact, she suggested brokers follow up with clients on an annual basis to keep up-to-date with any changes they may have experienced.
 
Related stories:
 
Brokers called to battle “disturbing” loan surge
 
Banks get tough on interest-only loans
 
Mortgage & Finance Association of Australia welcomes ASIC interest only findings

COMMENTS

  • by unqiuebdz 3/11/2016 8:32:56 AM

    This is a key factor of responsible lending. Discussing with your customers the risks and costs associated with a product not just the features and benefits.
    A risk of interest only is value of property not increasing, no principle having been paid off and customers needing to sell quickly.

  • by Really? 3/11/2016 8:44:10 AM

    Sick of so called experts - who aren't involved in lending - telling me what I'm doing or not doing.
    People trying to create an industry where an industry doesn't exist.

  • by Joker 3/11/2016 12:37:22 PM

    Retard expert,You guys fking know there is offset account ?

    You tell me who is not able to repay their loan with offset account have all the money?

    So the most secure thing people do is renting ?