ASIC has warned brokers to review their practices after an investigation found a majority of interest-only home loans are sold through the third-party channel.
Released today, the ASIC report noted there has been substantial growth (by number and value) of interest-only home loans approved both for investors and owner-occupiers. The total value of new interest-only home loans approved by ADIs accounted for around 42 per cent of all new home loans issued in the March 2015 quarter.
Across the 11 surveyed lenders, ASIC found that a greater proportion of interest-only home loans (by number) were sold through third-party channels than via direct channels.
“This indicates that brokers may be one driver of the increase of interest-only home loans,” the report said.
ASIC found that for the surveyed lenders in the December 2014 quarter, 57 per cent of the total number of interest-only home loans were sold through third-party channels (up from 49 per cent in the March 2012 quarter).
Meanwhile, approximately one third of all principal-and-interest home loans were sold through third-party channels, with a majority of loans (64 per cent) sold through direct channels in the December 2014 quarter.
While a high proportion of interest-only home loans originate through broker channels, responses from the surveyed lenders showed that incentives or commissions paid to third-party mortgage brokers, or internally to employees, were consistent for both interest-only and principal-and-interest home loans.
However, ASIC found that some lenders pay commissions to brokers on the balance of the outstanding loan, minus any amounts held in offset accounts; other lenders do not deduct offset balances from the loan amount when calculating commissions.
“There may be some incentive for a broker to recommend an interest-only home loan, as the principal will not initially be paid down and the trail commission will be paid for a number of years on a higher balance,” the report said.
“On average, consumers borrow more under an interest-only home loan — possibly because of the lower initial repayment figure under this type of loan and the effect of ‘present bias’.
“This may be an incentive for brokers to recommend an interest-only home loan.
“Conflicts of interest could be generated because of the higher commissions paid to brokers in line with greater loan amounts.”
Following ASIC's review, all 11 lenders have changed their practices in line with ASIC's recommendations or have committed to implementing necessary changes in the coming months.
The recommendations include ensuring loans align with consumers' requirements and objectives, lenders use consumers' actual expenses rather than relying on a benchmark and affordability assessments include buffers for future interest rate rises.
“We are pleased that the lenders involved in the review have already started implementing changes based on our findings,” ASIC deputy chair Peter Kell said.
“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.”