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Introduction

Welcome to Kaplan Professional’s Q&A series. To provide an overview of APRA’s tightening of residential mortgage lending practices and the practical implications of the changes for lenders and customers alike, we’re joined by Sophie Grace Compliance and Legal’s manager (licensing and compliance), Quynh Truong.

Question 1

Could you please take us through APRA’s perceived risks in the residential mortgage market that prompted the tightening of the lending rules?

APRA did some studies, and market research and found that interest-only lending represented nearly 40% of the residential mortgages lent by the authorised deposit-taking institutions [ADIs] — the banks. They found that this rate was really high in comparison to international standards and historical standards, so this prompted some questions and a warning.

Interest-only loans are perceived as a higher risk because most are for quite short periods — five or so years. [Many interest-only lenders encounter] what they term “payment shock” at the end of the term where there’s a huge jump in the repayments that have to be made once the interest-only loans revert to principle and interest. I don’t think a lot of those issues were being taken into account by banks when they were doing their responsible lending assessments and serviceability assessments.

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Quynh Truong

Quynh works across both Sophie Grace Pty Ltd and Sophie Grace Legal Pty Ltd with a particular focus on compliance and legal services. She manages the licensing and compliance aspects of the business. She is responsible for AFSL and ACL applications, variations and assists the compliance team in the implementation of compliance reviews. She provides ongoing compliance support and assists with the preparation of legal advice, commercial agreements and disclosure documents.