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It ‘no longer makes sense’ to recommend IO loans

by Lucy Dean4 minute read
Thumbs down, not recommended

Faced with increasing rates on interest-only loans, 'competent' brokers should only recommend principal and interest repayment structures for owner-occupier clients, Bell Partners has said.

According to the managing director of the financial advice company, the regulators’ crackdown on interest-only (IO) lending means “it doesn’t make sense” for owner-occupier clients to take out an IO loan.

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Mark Stevenson, managing director at Bell Partners Finance, likened the practice to “literally flushing tens of thousands of dollars down the drain”.

Further, IO repayment structures on owner-occupier loans only benefit banks, Mr Stevenson said, adding that “if we are acting in their [the banks’] best interests, then we are not doing our job”.

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Giving the example of a couple taking out an owner-occupier loan of $700,000, Mr Stevenson said that, with an IO rate that is just 1 per cent higher than a principal and interest (P&I) rate, customers could end up paying an extra $35,000 over five years, without building up any equity.

He said: “To be advising a client to take anything like the above [IO repayment structure] is bad advice and there would seem no argument that could justify such a position.”

Noting that the equivalent P&I repayments under that model would cost an additional $500 a month, Mr Stevenson argued that if that were to pose an issue to borrowers, then that would, in itself, “raise questions about the suitability and their affordability to repay a loan of this size”.

“If a borrower can’t afford the higher repayment now," he continued, "there need to be serious questions about how they will afford to make the even higher repayments in the future.”

The last few months have seen all major banks and many smaller lenders increase rates on IO lending in response to guidance from the Australian Prudential Regulation Authority to limit IO lending to 30 per cent on new lending.

[Related: NAB asks brokers for more information on IO loans]

It ‘no longer makes sense’ to recommend IO loans
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