Still room for improvement around interest-only loans: ASIC

by Phil McCarroll15 Sep 2016
Australia’s home loan industry has improved its standards around interest-only loans, but still has work to do according to the Australian Securities & Investment Commission (ASIC).

ASIC yesterday released its Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives report, which examined the responsible lending practices of 11 large mortgage brokers, with a particular focus on how they inquire into and record consumers' requirements and objectives.

According to the report, the number of new interest-only home loans generated by the 11 brokers fell by 16.3% in the six months from July 2015 to December 2015, with total value of these loans reducing by 15.6%.

Over the same period, the percentage of interest-only loans with a term greater than five years reduced by more than half, from 11.2% to 5.1%. 

Almost 80% of applications reviewed included a statement summarising how the interest-only feature specifically met the consumer's requirements and objectives, which was a significant increase on the 30% that did so when ASIC looked at lending practices in mid-2015.

ASIC deputy chairman Peter Kell said the regulator was pleased the industry had taken on its concerns regarding conduct around interest-only loans.

“It is vital that mortgage brokers understand consumers' requirements and objectives to ensure they are not placed in unsuitable credit contracts,” Kell said.

“ASIC is pleased that our concerns about interest-only loans and responsible lending are being acted on by the home lending industry, but there is still room for improvement,” he said.

While Kell said ASIC was pleased with the changes made recently, the report did outline further room for improvement.

ASIC recommends broker policies and procedures should provide tailored information on specific products and loan features, rather than just general information.

The regulator also recommends brokers ensure consumers understand the risks and costs involved in interest-only loans and that interest-only applications include a statement explaining how the interest-only feature of the loan specifically met the consumer’s needs.

ASIC also recommended that record keeping practices are improved.

The report also looked at whether lenders had changed their practices since ASIC had examined their conduct in mid-2015.

It found that since August 2015, the percentage of new home loans approved by lenders which are interest-only has decreased by 12% and the amount that can be borrowed by an individual consumer through an interest-only
home loan has decreased, as lenders have adjusted their assessment of consumers' ability to repay.