Brokers called to battle “disturbing” loan surge

by Miklos Bolza14 Oct 2016
APRA's quarterly report, Authorised Deposit-taking Institution (ADI) Property Exposures, has revealed that the amount of interest-only loans by owner-occupiers with major banks has increased from around $6 billion in June 2015 to $59 billion in June 2016.

Adrian Raftery, senior lecturer in financial planning at Deakin University has said that this increasing number of interest-only loans is a "disturbing trend" which may trigger higher loan defaults.
 
Speaking with The New Daily, Raftery said that the greater number of first home buyers resorting to interest-only loans is a ticking time bomb for low-income borrowers who have entered the property market in the past 12 months.
 
“There’s been a lot of brainwashing from the operators of get-rich-quick schemes encouraging investors and owner occupiers to take out interest-only loans,” he said.
 
“Brokers are also contributing to the growth of interest-only mortgages because they get bigger trail commissions from banks when borrowers take longer to reduce the principal.”
 
While the rise in the number of interest-only loans was not directly attributable to brokers, “they’re obviously a benefactor,” he told Australian Broker.
 
In the end though, the majority of the blame can be laid on the banks, he said.
 
“Ultimately the banks would be quite happy if borrowing limits continued to rise because they make a nice margin on every loan effectively.”
 
When asked what brokers could do, Raftery said it was important to think about the business plan in a long-term, 10 or 20 year timeframe.
 
“My belief is the quicker that your client can pay down the loans, the more opportunities they have to borrow again with you,” he said. “Do brokers want to have the same clients with the same loans that they broke ten years ago or do they want to continue writing new loans for the second, third and fourth property as well?”
 
He suggested downplaying the interest-only loan as an option and more heavily promoting principle and interest loans instead.
 
“Over the long-term, you’ve got a repeating customer coming back to you. They become a client so it becomes a lot more valuable as well.”