ASIC demand lenders improve standards following interest-only loan review

ASIC demand lenders improve standards following interest-only loan review
ASIC demand lenders improve standards following interest-only loan review

A report from ASIC has found lenders offering interest-only mortgages need to lift game to comply with consumer protection laws.

ASIC's probe into interest-only home loans was announced in December 2014 and assessed how 11 lenders, including the big four banks, are complying with responsible lending laws.

The report recommends that lenders and brokers should review to ensure compliance with responsible lending obligations. All 11 lenders have changed their practices in line with ASIC's recommendations or have committed to implementing them. The recommendations include:

  • Loans align with consumers' requirements and objectives
  • Lenders use a consumers' actual expenses rather than relying on a benchmark
  • Affordability assessments include buffers for future interest rate rises.

According to ASIC, demand for interest-only loans had grown by around 80% since 2012 and the review looked at 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.

ASIC found lenders have not been meeting all responsible lending obligations in the provision of interest-only loans and 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

ASIC Deputy Chair Peter Kell said 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," he said.

"We are pleased that the lenders involved in the review have already started implementing changes based on our findings. The rest of the lending industry, including brokers, should  now take note and swiftly review the practices they have in place to ensure they comply with their responsible lending obligations."

According to ASIC, based on a $500,000 principal and interest home loan over thirty years, a consumer would pay around $579,032 in interest with a constant interest rate of 6%. For an interest-only loan of the same amount, with the same interest rate consumers would pay the following:

 

 

Length of interest-only period

Interest payable over term of loan

Additional interest paid compared to   principal-and-interest home loan

5 years

$616,258

$37,226

10 years

$659,752

$80,720

15 years

$709,503

$130,471

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

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Asic Lending

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