ASIC warns lenders to 'lift standards' on interest-only lending

by Julia Corderoy20 Aug 2015
Lenders providing interest-only mortgages need to lift their standards to meet important consumer protection laws, ASIC has warned.

After a regulatory probe into interest-only lending, ASIC identified that demand for interest-only loans had grown by around 80% since 2012. 

In December, the regulator announced it would be conducting a review into interest-only home loans. The review looked at looked at 11 lenders, including the big four banks, and assessed how consumers were assessed for loans by lenders with a focus on the affordability of the loans over the longer term.

The review found that interest-only loans are more popular with investors and those on higher incomes, and that delinquency rates are currently lower for interest-only home loans.

However, ASIC also found that lenders have been falling short of their responsible lending obligations in the provision of interest-only loans. According to the regulator, lenders are often failing to consider whether an interest-only loan will meet a consumer's needs, particularly in the medium to long-term.

ASIC’s review of more than 140 consumer loan files from bank and non-bank lenders identified:
  • In 40% of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did
  • 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
  • In over 20% of files reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks
These practices can expose borrowers to not being able to afford their loan repayments in the future, particularly for interest-only loans, which have much higher repayments after the initial interest-only period ends.

“Interest-only loans may be a reasonable option for some borrowers. However, lenders must have robust processes in place for assessing a customer's ability to afford a loan, taking into account the increased repayments once the interest-only period ends. They should lend responsibly, and in a way that does not result in consumers taking on debt that they cannot afford, especially if interest rates rise,” ASIC deputy chair Peter Kell said.

Following ASIC's review, all 11 lenders have changed their practices in line with ASIC's recommendations or have committed to implementing necessary changes in the coming months. 


  • by RC 20/08/2015 9:38:30 AM

    Where is the freedom of choice and non discrimination against the borrower in reference to lending options. With what ASIC are talking about here can blatantly penalise against older borrowers taking out a long term home loan which I was always under the belief was not acceptable from a discrinmantory lending aspect.
    Last I was aware Australia was still a non communistic society, and offered the opportunity to all Australians that were in a position to repay a home loan the opportunity to buy and live in a house they could call their home.
    Who is ASIC actually stating they are trying to protect here?
    Freedom of choice is still an Australian right.
    Also, As adults I believe we still have a right to make choices.
    ASIC.What gives you the right to believe you can discrinminate against older Australians having the right to own or buy their own home.
    This type of Legislation & bureaucratic zealousness is NOT acceptable.
    Pull you head in for once ASIC & allow us the right to choose.
    Better to have had than not too.

  • by GC 20/08/2015 9:55:14 AM

    Unfortunately ASIC, as usual has again got it wrong and clearly has no idea of how people manage their own mortgage. I'm sure they have never actually called any of the 140 customers whose file they audited and asked what their strategy is for having an interest only loan. That would require real effort on their part - to find out the complete story.
    The type of loan & structure is absolutely none of ASIC's business. This is between the customer and the lender only.

    Has ASIC even realised that the public are not stupid, that we do successfully manage our own affairs with their assistance or supposedly superior knowledge. Do they understand that lenders have no ability to actually control affordability once the finance has been provided? The variables that could effect affordability are incalculable so the lenders could never account for any issues that may possibly arise. The only thing they can rely on is the clients history and good character.

    ASIC are too busy telling everybody how to live, punishing people who are trying to get ahead in life with property investment and now, telling us how we should structure our own finances. If the strategy is to create wealth while only servicing the loan with interest payments then why is this a dangerous strategy? The bank holds the security - which actual history shows to grows in value, so the debt to equity ratio decreases on an ongoing basis. Therefore the risk to the bank is constantly diminishing.

    The banks have very successfully managed their businesses without ASIC interventions for over 100 years. Its about time they backed off and stop meddling in our affairs and financing. By all means, ensure the banks are strong and equitable but dont come up with dribble like this or tell us what to do with our own finance. This is something ASIC or any GOVT. department for that matter has absolutely no right to involve itself in.

  • by Steve 20/08/2015 10:41:51 AM

    This article shows how out of touch or ignorant the authorities are. Lenders have always assessed a loan based on P & I even for an Interest Only loans. The assessment is normally done over the shorter P & I term which reduces the borrowing capacity. This could also be highlighting the fact that the lenders are providing in appropriate loans to investors via their direct retail channels.