A veteran mortgage broker has said that the government and regulators often don’t understand the intricacies of the mortgage industry after ASIC announced an interest-only probe into the industry.
When APRA and ASIC first expressed concern over the rise in interest-only home loans last year – suggesting this may be representative of a broader trend towards risky lending practices – Ray Weir, director of Finance Solutions WA wrote a letter to both regulators
, saying there are many logical and safe reasons as to why a borrower takes out an interest-only loan.
Since then, ASIC has finished an investigation into the interest-only lending practices adopted by lenders, including the major four, and on Friday announced another investigation – but this time it will be probing mortgage brokers. But Weir has told Australian Broker
that he has not budged on his position regarding interest-only home loans, saying ASIC couldn’t be more wrong.
“My position hasn't changed since my letter to ASIC last December. Investors in particular insist on interest only loans to maximise the tax deductions. If they have spare funds they should use those to repay non-deductible debt such as credit cards or home loans.
“As mentioned in my letter, there are several special occasions when owner occupiers want an interest only loan, even if it’s for the first 12-24 months while they sell other property, so they can ultimately make a sizable reduction in their home loan.
“If ASIC think it’s because lenders and brokers recommend interest only payments to reduce the commitment level and help borrowers get a larger loan, they couldn't be more wrong.”
According to Weir, lenders require that if, for example, a borrower requests a standard 30-year loan with the first five years being interest only, then the serviceability calculator will automatically recalculate the loan repayments as if the loan term is 25 years because nothing is paid off in the first five years.
But by shortening the effective term in the serviceability calculator to 25 years – and consequently increasing the repayments – the loan amount the applicants can apply for is actually reduced if they insist on an initial interest only period.
“In other words the amount that can be borrowed is less for an interest only loan compared to a principal and interest loan. I bet ASIC don't understand this," Weir told Australian Broker
“I've found over the past 29 years as a broker that Government regulators often don't understand such intricacies of the mortgage industry. Unfortunately the Government liaison officers employed by the two peak industry bodies are not practicing brokers and they also don't fully understand the day to day practices of the industry, or the needs of borrowers, despite their lofty positions.”