ASIC continues its focus on interest-only lending, in particular, interest-only home loans and has recently concluded the first stage of its targeted review into the practice.
The first stage of the review involved the collection and analysis of interest-only home loan data from 16 providers. These providers were a mix of large, mid-tier and smaller banks as well as non-bank lenders.
The 16 providers reviewed by ASIC provided $14.3 billion in interest-only lending to owner-occupiers in the June 2017 quarter which, though still a huge figure, is significantly less than the $19 billion provided in the September 2015 quarter. The drop is likely to be an indication of tighter lending practices in this area, particularly as ASIC continues to scrutinise these lending arrangements.
The review also concluded that Australia’s major banks have reduced their interest-only lending by $4.5 billion in the past year. However, ASIC has cautioned that this reduction has been partially offset by other types of lenders increasing their share of interest-only lending.
Interest-only lending is not inherently bad or unsuitable provided that the lending is responsible and entirely appropriate to the needs and resources of the client. ASIC’s concern about interest-only lending stems from a number of features particular to these types of loans that can lead some borrowers to difficulty, including:
- the initially lower premiums may be an inducement for borrowers with lower capital or income but will result in higher premium payments once the interest-only period ends. In most cases the premium will rise to a level beyond what they would have been had the borrower initially opted for a principal and interest loan; and
- the borrower will pay more over the life of the loan than they otherwise would have, and as the name suggests the principal won’t reduce during the interest-only period which means once this period ends the borrower will have a smaller amount of time in which to pay off the principal.
ASIC will now carry out the second stage of the targeted review which will include a particular focus on individual loan files with a view to ensuring that these types of loans are provided in ‘appropriate circumstances’. The lenders and mortgage brokers whose files will be reviewed have been selected based on several undisclosed criteria. ASIC has confirmed that a lender or mortgage broker’s relative share of interest-only lending was a factor in the selection.
ACL holders, in particular, mortgage brokers and lenders, should ensure that as with any financial product sold to a client an interest-only loan is suitable for the needs of the client to whom it is sold. Under their responsible lending obligations, ACL holders should ensure that the loan is affordable for the borrower and if their client files were to be reviewed, they could demonstrate a reasonable basis for suggesting a client apply for an interest-only loan and should be explicit with the client about the drawbacks of this type of lending.
As detailed in our previous blog article on this topic we are seeing an increased level of scrutiny during the ACL licensing process. This includes additional rounds of questions from ASIC and requests for more detailed information including about the applicant’s serviceability assessment tool and the applicant’s justification for the net income and interest rate buffers. We believe that ASIC’s spotlight on interest-only lending and the increased level of scrutiny on ACL applicants may be the cause of the large delay in ASIC’s processing of ACL applications for new loan issuers. We are seeing these applications take anywhere between 9 and 12 months to be processed by ASIC.
This article is based on the information provided in ASIC’s Media Release 17-341MR ASIC updated on interest-only home loans.
For further information and Sophie Grace’s recommendations to clients who conduct interest-only lending, please refer to our previous blog article ‘ACL Holders and Applicants Take Note – Regulator Scrutiny of Interest-Only Loans and Responsible Lending Practices’.