Powered by MOMENTUM MEDIA
Powered by MOMENTUM MEDIA
SUBSCRIBE TO OUR NEWSLETTER SIGN UP
Powered by MOMENTUM MEDIA

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.

Brokers ‘gaming the system’ on interest-only loans: lawyer

house and coins

house and coins
James Mitchell 2 minute read

As ASIC prepares to release the findings of its report on interest-only mortgages, one Sydney property lawyer believes the prevalence of these loans in the Australian mortgage market will ultimately diminish.

Anthony Cordato of Cordato Partners Lawyers said brokers have been “gaming the system” by only considering the affordability of the interest-only payments and not looking a couple of years down the track at the affordability of principal-and-interest, or P&I, payments.

“Interest-only loans serve a useful purpose, it’s just that the brokers have been gaming the system,” Mr Cordato told The Adviser.

“They’ve been encouraged to do that by the lenders, of course.

“I think that will change. ASIC will come out absolutely the way Westpac came out last week saying that they must assess the affordability of these loans based on P&I.”

Mr Cordato referred to recent comments made by Westpac CEO Brian Hartzer that in the UK, interest-only loans are now only a fully advised financial product.

Speaking at the 2015 Aussie Sales Conference in Melbourne last week, Mr Hartzer explained that a fully advised product means that you are able to demonstrate the customer’s ability to pay, that you have evidence of that, and that the product is suitable.

“In the light of what we have seen in the last couple of months, the way brokers assess the suitability of interest-only loans has been incorrect.

Advertisement
Advertisement

“They should have been taking the P&I amount, not just the interest-only amount,” he said.

Mr Cordato said loan repayments increase by almost 50 per cent when an interest-only loan reverts to a 25-year principal-and-interest loan, significantly reducing the borrower’s capacity to borrow.

“For these reasons, it is inevitable that interest-only loans will decline as a loan product in Australia,” Mr Cordato said.

The financial regulators in Australia are looking carefully at interest-only loans.

However, despite recent regulatory scrutiny interest-only loans continue to thrive in the Australian home loan market.

PROMOTED FEATURES


“Interest-only loans are popular for property investors and owners in Australia – they represent 37.4 per cent of all residential term loans held by the Australian banking system.

“That percentage is increasing – in the March quarter it was 42.3 per cent of loans,” Mr Cordato said.

ASIC identified that demand for interest-only loans had grown substantially since 2012.

Tomorrow the corporate watchdog will present its findings of a review that looks at how consumers were assessed for loans by lenders with a focus on the affordability of the loans over the longer term.

ASIC said the report will make a number of recommendations that lenders should review to ensure they are complying with responsible lending obligations.

[Related: Step away from interest-only loans, says Smartline]

Brokers ‘gaming the system’ on interest-only loans: lawyer
house and coins
TheAdviser logo
house and coins
James Mitchell

James Mitchell

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.

He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.

James holds a BA (Hons) in English Literature and an MA in Journalism.

 

 

more from the adviser
house coins ta Aussie reports record spike in pre-approvals

The major brokerage has reported a record increase in home loan p...

Money jar Facebook launches SME grants program

The social media giant has commenced processing applications for ...

uptick Aggregator reports surge in settlements

Purple Circle Financial Services has reported a record increase i...

FROM THE WEB