ASIC warns on lending standards

The Australian Securities and Investments Commission on Thursday released a review that revealed a range of flaws in how 11 lenders, including the big four banks, were assessing customers for interest-only mortgages.

For investors during the same period, the average value of interest-only home loans was over 20 per cent higher than principal-and-interest home loans.

They are more expensive than standard mortgages, in which borrowers repay the principal and interest from the outset.

“Interest-only loans may be a reasonable option for some borrowers”.

This makes repayments lower in the short-term, but higher over the life of the loan.

A review of 140 customer files across the lending institutions found that in 40 per cent of cases, lenders wrongly calculated how much time borrowers had to repay the principal when the interest-only period of the loan ended, assuming they had more time than was actually the case.

ASIC also found that 20% of lenders had not properly considered the borrower’s actual living expenses when approving the loan, while some lenders entirely ignored the borrower’s expenditure information and any other debt in affordability calculations. This is a message for the entire industry.

Interest-only loans are generally more popular with housing investors, especially those who are basing their purchase on rising property prices and using negative gearing to claim interest payments as a tax deduction.

ASIC deputy chair Peter Kell said the regulator was disappointed to find that the practices of many lenders fell short of expectations.

“The growth in owner-occupiers taking out these loans has been quite significant”. Owner occupiers accounted for 41 per cent of interest-only loan approvals in December a year ago.

“A significant proportion of those owner-occupiers are on what you might call lower incomes for this type of loan; $100,000 and less”.

“People just need to be really clear about why they’re taking on an interest-only loan”.

Following the review, all 11 lenders have changed their practices in line with ASIC’s recommendations or have committed to implementing necessary changes in the coming months, ASIC said in a statement. According to the regulator, lenders are often failing to consider whether an interest-only loan will meet a consumer’s needs, particularly in the medium to long-term.