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APRA boss warns broker-originated loans are ‘higher risk’

by James Mitchell4 minute read

APRA chairman Wayne Byres has made damning remarks about the quality of loans originated via the third-party channel in a speech in Sydney this week.

Speaking at the Australian Business Economists Lunchtime Briefing in Sydney yesterday, Mr Byres said that broker-originated loans tend to have a materially higher default rate compared to loans originated through proprietary channels.

“This does not mean third-party channels have lower underwriting standards, but simply that the new business that flows through these channels appears to be of higher risk, and must be managed with appropriate care,” he said.

The APRA chairman’s comments follow the release of a report by ASIC last week, which showed an increase in interest-only loans and raised broker commissions as a potential issue.

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ASIC’s report found that 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 found that, 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,” the report said.

“Conflicts of interest could be generated because of the higher commissions paid to brokers in line with greater loan amounts.”

Mr Byres also made reference to ASIC’s findings yesterday, pointing out that the rise in interest-only loans has been prevalent among owner-occupiers as well as investors.

“There are many reasons offered for why this might be, but the increasing prevalence of interest-only lending does reduce the committed build-up of borrowers’ equity buffers that principal-and-interest loans naturally provide,” he said.

“Australians have, thus far, not been taking advantage of record-low interest rates to fix the rates on their borrowings.

“Obviously the sensitivity of borrowers to any increase in interest rates in the future will be a function of the extent to which they have maintained variable rate loans.

“At least thus far, there is little evidence that this sensitivity is being reduced.”

[Related: Brokers on notice following ASIC lending probe]

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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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