ASIC educates consumers on interest-only risks

by Julia Corderoy20 Oct 2015
Corporate regulator ASIC has released a suite of online tools to help consumers better understand the risks of interest-only mortgages.

The new tools, available on ASIC's consumer-directed MoneySmart website will include an interest-only mortgage calculator, which the regulator says will help consumers work out the real cost of an interest-only home loan, and an interest-only loan infographic that depicts the typical scenario of borrowers who take out different types of mortgages.

This comes after ASIC warned lenders providing interest-only mortgages to lift their standards to meet important consumer protection laws. A regulatory probe into interest-only lending by ASIC in December revealed that in 40% of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did and in over 30% of files reviewed, there was no evidence that the lender had considered whether the interest-only loan met the borrower's requirements.

ASIC deputy chairman, Peter Kell, said while ASIC's review had found that banks and other lenders needed to lift their game to ensure compliance with responsible lending obligations, consumers can do more to help themselves.

“For most Australians, a mortgage is one of the most significant financial decisions they will make in their lives,” Kell said.

“While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run.  Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages.”

According to ASIC, the demand for interest-only loans has grown by around 80% since 2012.