1 in 3 Interest Only Loans issued don't meet borrower's needs, new ASIC report claims

Today ASIC told mortgage lenders, big and small, to lift their game when they issued an interest only loan. The probe into interest only loans (announced by ASIC in December 2014) examined the big four banks and seven smaller lenders, in an effort to ensure responsible lending practices for interest only loans. ASIC reviewed how lenders assessed consumers and long-term affordability of loans they issued.

This probe came as a result of an 80% growth in interest only loans, with the Interest Only Loan being very popular amongst investors and higher income consumers. Whilst the popular rise of the Interest Only Loan has been beneficial for many lenders, ASIC found that some lenders have failed short of their obligations in the provisions of interest only loans; with many failing to considering the consumer's needs long-term when issuing interest only loans.

ASIC cracks down on Interest Only Loans

ASIC's review of interest only loans found:

  • In 40% of loans, affordability calculation assumed the borrower had much longer to pay off the principal then they actually had.
  • In 30 % of loans, lenders did not appear to consider whether the interest only loan was adequate with the borrower's requirements
  • In 20% of loans, lenders did not factor in the ACTUAL living expenses of the borrower, when approving their loan.

ASIC claims these practices expose borrowers to a great risk as they may fail to pay their loan in the future; particularly on interest only loans, which have high repayments (after the expiry of the interest only period).

ASIC makes a few recommendations for lenders, their biggest being that lenders should review their current practices and ensure that they are complying with responsible lending obligations (especially considering interest only loans rise in popularity). Other recommendations include:

  • Lenders should ensure the loans they issue fit the consumers' objectives and requirements
  • Lenders should factor in the consumers' actual expenses, instead of using benchmarks
  • Lenders should ensure that affordability assessments include buffers which factor in possible future interest rate rises.

Find out more about ASIC's review: http://bit.ly/1MEiccG

Posted on: 20-Aug-2015