'Interest Only' Loans Probed by ASIC.
In December 2014 ASIC, the Australian Securities and Investment Commission, launched an investigation into the prevalence of interest only loans.
Interest only loans allow for individuals to take out loans whereby they only pay the interest on the loan and not the principal amount. While this type of loan has been around for a while, mainly in the property investor sphere, over the past few years the prevalence of interest only loans in the owner occupied space has begun to increase.
ASIC identified that since 2012 the demand for interest only loans had grown by around 80%. The review into these loans found a number of interesting and somewhat concerning facts:
- Interest only loans are more popular with investors and those on higher incomes
- The delinquency rates are currently lower for interest only loans
- 41% of interest only loans were for home occupiers
- The average value of interest only loans was substantially higher than principal and interest loans
- 29% of owner occupiers with interest only home loans earned less than $100,000
- Relating to Responsible Lending:
- 40% of files reviewed, the affordability calculations assumed the borrower has longer to repay the principal on the loan than they actually did.
- In over 30% of files reviewed there was no evidence that the lender had considered whether the interest only home loan met the borrower’s requirements
- In over 20% of files reviewed lenders had not considered the borrower’s actual living expenses when approving the loan but relied on expense benchmarks
Implications
- The prevalence of interest only home occupier loans combined with the lack of affordability calculations including living expenses and the lower earnings of individuals could create a situation where, if interest rates were to increase, these home occupiers could find themselves with a loan they cannot service: a pathway to default.
- ASIC has recommended lenders take more responsibility to ensure that the borrowers understand the loan and are familiar with the product.
- Lenders must make responsible enquiries into borrower's living expenses.
If you would like to read the full report by ASIC, please contact Frank Legal at marketing@franklegal.com.au .
This is not to be taken as legal advice.