Interest-only loans have been under intense scrutiny for some time now. Earlier this year, APRA told lenders to limit new interest-only lending to 30 per cent of new residential mortgages. Over the past six months ASIC has been conducting a review of 16 home loan providers, examining whether interest-only loans are being appropriately recommended.

Recently, ASIC provided an update on its review which revealed that Australia’s major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have increased their share of interest-only lending.

ASIC’s interest-only lending review has also found that:

  • borrowers who used brokers were more likely to obtain an interest-only loan than those sold directly by a lender; and
  • a significant number of older Australians nearing retirement continue to be provided interest-only owner-occupier loans.

ASIC is now reviewing individual loan files from lenders and mortgage brokers to ensure interest-only loans are only sold where it is warranted and where the customer is fully aware of the nature of the product. Demonstrating consumer lack of understanding of the product, a UBS survey last week found one-third of interest-only borrowers were unaware they were not paying down the loan’s principal.

Westpac is the largest lender to property investors, with interest-only loans making up more than 50% of the bank’s mortgage portfolio. Westpac has defended its high exposure to interest-only housing loans, which is the highest of all the major banks, insisting they are comfortable with the risks linked to such loans.

Chief Executive of Westpac, Brian Hartzer, told a House of Representatives review that Westpac “don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so”. Mr Hartzer claimed the Reserve Bank is more concerned with the macroeconomic issues if interest rates rise and borrowers have to spend more of their income paying down their mortgage.

ASIC is also concerned about the impact an interest rate rise will have on discretionary spending and the flow-on effects that could result in higher unemployment, which threatens the housing market.

The Council of Financial Regulators is concerned about high house-hold debt and slow wage growth. This diminishes the ability for households to withstand unforeseen economic shocks.

ASIC expects lenders offering interest-only loans to be making thorough enquiries into the financial status and the needs of their clients. The spotlight has been on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their responsible lending obligations.