The financial services regulator has revealed that it will “shortly” begin contacting brokers that have a “high proportion of interest-only loans” and start reviewing their loan files.
The Australian Securities & Investments Commission (ASIC) has now concluded the first stage of its work into interest-only (IO) mortgages, which the regulator believes are “more expensive than principal and interest loans and do not always meet the needs of the consumer”.
ASIC and the Australian Prudential Regulation Authority (APRA) have both voiced concerns over the perceived risks of IO loans. The prudential regulator asked banks in March to restrict the flow of this type of lending to 30 per cent of total new residential mortgages, while ASIC’s review into broker remuneration stated that “brokers arranged at least 50 per cent more interest-only loans, and up to four times as many”.
While the remuneration review document states that this does not necessarily mean that they delivered poor consumer outcomes (and the chairman of ASIC has said that “you need to think about looking at what the banks are showing in terms of the results of their mortgage portfolios before you can really draw any conclusions from that statistic”), ASIC is reportedly of the belief that “while interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense”.
ASIC to begin reviewing loan files
ASIC’s review looked at data from 16 home loan providers*, including the big four, several mid-tier banks and some non-bank lenders.
According to the review, Australia's major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending.
The 16 lenders reviewed by ASIC provided $14.3 billion in interest-only loans to owner-occupiers in the June 2017 quarter, down from $19 billion in the September 2015 quarter.
In a statement released on Wednesday (11 October), ASIC said: “With many lenders, including major lenders, charging higher interest rates for interest-only loans compared with principal and interest loans, lenders and brokers must ensure that consumers are not provided with unsuitable interest-only home loans.”
It again reiterated the finding that “borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender”.
As such, the second stage of the review will involve “reviewing individual loan files from both lenders and mortgage brokers”.
ASIC explained: “These lenders and mortgage brokers have been selected based on a number of criteria, including their relative share of interest-only home lending.
“ASIC will examine individual loan files to ensure that lenders are providing interest-only home loans in appropriate circumstances. ASIC will carefully review cases where owner-occupiers have been provided with more expensive interest-only home loans, to ensure that consumers are not paying for more expensive products that are unsuitable.”
Following on from a UBS report which suggested that a third of IO borrowers did not know the type of repayment they were making, ASIC has emphasised that “no consumer should be surprised by the type of home loan product that they have obtained”.
It therefore highlighted that both lenders and brokers “must have a reasonable basis for suggesting that a consumer apply for a particular loan product”.
ASIC deputy chair Peter Kell commented: "The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations.
"While interest-only loans may be a reasonable option for some borrowers, lenders must make appropriate enquiries into the needs and financial circumstances of their customers, and they must be able to demonstrate that they have done so."
The review comes two years after one conducted by ASIC that concluded that some “lenders were not properly inquiring into a consumer's actual living expenses when assessing their capacity to make repayments” on interest-only loans.
*The 16 lenders are:
- Australia and New Zealand Banking Group Limited
- Australian Central Credit Union Ltd (trading as People's Choice Credit Union)
- Bank of Queensland Limited
- Bendigo and Adelaide Bank Limited
- Citigroup Pty Limited
- Commonwealth Bank of Australia
- ING Bank (Australia) Limited
- La Trobe Financial Services Pty Limited
- Liberty Financial Pty Ltd
- Macquarie Bank Limited
- Members Equity Bank Limited
- National Australia Bank Limited
- Pepper Group Limited
- Suncorp-Metway Limited
- Teachers Mutual Bank Limited
- Westpac Banking Corporation