ASIC’s interest-only lending review

  • By Elizabeth Fry

The corporate watchdog’s review of interest-only loans has revealed that borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender.

The ASIC review, which was announced in April 2017, was a targeted industry surveillance examining whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans.

The first stage of ASIC'sreview -  now concluded - involved data collection from 16 home loan providers including large banks, mid-tier and smaller banks, and non-bank lenders.

ASIC found that Australia's major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending.

The 16 lenders surveyed provided $14.3 billion in interest-only loans to owner-occupiers in the June 2017 quarter, down from $19 billion in the September 2015 quarter.

ASIC's  interest-only lending review has also found that borrowers approaching retirement age continue to be provided with a significant number of  interest-only owner-occupier loans.

The watchdog has now moved into the second stage of its review, and will be reviewing individual loan files from both lenders and mortgage brokers to ensure that lenders are providing interest-only home loans in appropriate circumstances.

Responsible lending

ASIC will carefully review cases where owner-occupiers have been provided with more expensive interest-only home loans, to ensure that consumers are not paying for more expensive products that are unsuitable.

Under the responsible lending obligations, lenders and brokers are required to make sure that a loan meets the requirements and objectives of a consumer, in addition to making sure that the loan is affordable.

Lenders and brokers must have a reasonable basis for suggesting that a consumer apply for a particular loan product, and no consumer should be surprised by the type of home loan product that they have obtained. 

In an update, ASIC deputy chair Peter Kell said he expected lenders offering these types of loans to be making thorough enquiries into the financial status and the needs of their clients:

"The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations," he said.

"While interest-only loans may be a reasonable option for some borrowers, lenders must make appropriate enquiries into the needs and financial circumstances of their customers, and they must be able to demonstrate that they have done so."

ASIC will consider appropriate enforcement action if breaches of the law are identified.