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

by James Mitchell5 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.

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“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.

“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.

“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]

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James Mitchell

James Mitchell

AUTHOR

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

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