With sharply rising housing prices, particularly in the Sydney and Melbourne markets and persistent talks of a possible housing ‘bubble’, insurers in classes exposed to the lending sector – financial institutions, mortgage brokers, originators and property valuers – are increasingly seeking to assess their exposures.
This assessment generally involves two key components:
- What is likely to happen to economic activity and housing prices in the short to medium term?
- Are current lending practices sufficiently robust to avoid high default rates in the event of an economic and housing price downturn?
There are, in turn, a number of factors which feed into each of the above questions. One important factor in the second question is the current lending practices of the major institutions.
This morning ASIC released its report into lending practices in the interest-only home loan sector. With demand for interest-only loans having grown by around 80% since 2012, the review was timely.
ASIC’s review looked at how consumers were assessed for loans by lenders with a focus on the affordability of the loans over the longer term. The review, which was based on a sample of more than 140 consumer loan files from 11 bank and non-bank lenders (including the ‘Big 4′ banks), identified that:
- In 40% of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did
- In over 30% of files reviewed, there was no evidence that the lender had considered whether the interest-only loan met the borrower’s requirements
- In over 20% of files reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks.
It was hardly a glowing endorsement. The good news, however, is that interest-only loans are more popular with investors and those on higher incomes, and that delinquency rates are currently lower for interest-only home loans. ASIC also reports that, since the review was completed, it has worked with the institutions concerned to tighten up procedures to address the identified shortcomings and to ensure that they comply with their responsible lending obligations.
To read ASIC Report 445 in full, click here.