Australian banks warned on interest-only lending

by Adam Smith02 Sep 2014
A ratings agency has issued a warning to Australian banks over higher risk loans.

New data from APRA has shown interest-only loans made up 43.2% of new loans in the latest quarter, while investment loans have risen to 37.9% from 32.6%. The result prompted Moody's senior credit officer Ilya Serov to warn that the loans could carry a high risk for banks.

“Although investment and IO loans performed well during the global financial crisis, they inherently carry higher default probabilities and severities, and a larger proportion of such loans risks leading to higher delinquency levels for Australian banks at times of stress,” Seroy said.

Seroy argued that interest only loans are more exposed to rate rises than principal and interest loans.

"Our expectation that interest rates in Australia will rise over the next 18 months means there is an increased likelihood of a payment shock for these borrowers at the end of the initial IO period," Serov said.