Banks get tough on interest-only loans

by Miklos Bolza12 Oct 2016
More major and non-major banks are bringing in tougher conditions on interest-only loans thanks to increased regulatory pressure.
Amongst the big four, Westpac decided to reduce the maximum allowable interest-only term to 10 years from 3 October, a spokesperson told Australian Broker. Previously, this term could be extended up to 15 years.
Additionally, the bank will also no longer offer the 12-year fixed rate investment property loan and its low documentation equivalent.
Commonwealth Bank brought in tougher conditions for those seeking to switch to an interest-only loan back in July.
“Commonwealth Bank constantly reviews and monitors its suite of home loan products and services to ensure we are maintaining our prudent lending standards and meeting our customers' financial needs,” a spokesperson told Australian Broker.
“As part of our commitment to responsible lending, whenever a customer applies or seeks to make changes to their loan, we always enquire into their needs and objectives. Customers who switch to interest-only as the repayment option must advise us of the reason.”
Agencies such as the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) have been placing increased pressure on all banks.
Martin North, principle of Digital Finance Analytics, told the Australian Financial Review that lenders were offering more selective discounts instead of slashing rates.
“Earlier in the year there was a load of rate cutting going on, and a reduction in discounts from advertised rates – this is now reversing as loans are being repriced up, allowing for greater selective discounts.”
The non-majors are also following suit with Bendigo Bank and Adelaide Bank reducing the maximum interest-only period from 10 years to seven.
As a result of this pressure, the value of new interest-only loan approvals has dropped from around $44b in June 2015 to $28.1b by March this year, according to a review of interest-only home loans by ASIC. This figure then bounced back to $35.5b in the second quarter.
Market share for interest-only loans from June 2015 to June 2016 also dropped from 46% to 36%.