Interest-Only Home Loan Crackdown

Michael Sadaat from ASIC and I discuss about how they have joined APRA in cracking down on interest-only home loans.

Interest Only Home Loans Crackdown

Ross: Welcome back to Money News right around Australia. Now, as you’ve been hearing the last little while, there has been big issues in regards to home lending in Australia, in particular, interest-only loans. Now, this was also something that was raised by the Reserve Bank Governor Philip Lowe. I played you one grab of the Reserve Bank Governor Philip Lowe a little earlier. Well, here’s just a little something else that he said during that key speech last night.

Philip: Financial institutions do need to take a systemic focus or system-wide focus in their risk assessments. Despite the focus in this area over recent times, too many loans are still being made where the borrower has the skinniest of income buffers after interest payments. In some cases, lenders are assuming that people can live more frugally than in practice they can. That’s leaving the borrowers with very little buffer if things go wrong as they sometimes do. APRA quite rightly said that lenders can expect a very strong supervisory focus from it.

Ross: Therefore, as a result, there’s even been more of this today. I spoke earlier about the conference that was on today. Anna Bligh spoke at that conference as well. The Financial Review ran that in regards to banking. There’s other aspects of this because today, again, APRA, the Australian Prudential Regulatory Authority, and Wayne Byres, who’s the boss there, has spoken at that banking and wealth summit. Again, he’s also said that, “As a prudential regulator, I’m attracted to the idea that fortune favors the strong,” but what he’s also saying is that you want to maintain strength in our financial system.

Now, bear in mind what’s taking place right now is a deliberate strategy from all areas of regulation. From certainly APRA the banking regulator, from the Reserve Bank, which clearly has some control, but it’s really all about mainly jawboning. In other words, talking about the problem. But on top of that, our corporate regulator, the Australian Securities and Investments Commission. On the line is the senior executive and the leader of deposit takers and insurers for that. You can read banks and other financial institutions. Michael Saadat.

Interview with Michael Saadat, ASIC

Appreciate your time as always, Michael.

Michael: Good to be with you, Ross. Thanks for having me on.

ASIC Maintain strength in financial system

Ross: It’s important, isn’t it, that we maintain strength and confidence in our financial system? It’s also important from a finance stability point of view that those organizations and even your own, ASIC, is clamped down recently on interest-only loans and the advice that’s been given by some. It’s important that they don’t get out of control and create problems. Not only in households, but potentially inside their own organizations?

Michael: Yes, that’s right. Under the law that we administer, lenders are required to make sure they’re lending responsibly, which means that the loans that they’re providing have to be affordable for the borrowers. Both today when interest rates are at record lows, but also into the future given that home loans are a long-term financial commitment.

Ross: Okay. I think it was certainly today that Wayne Byres indicated that because interest rates are low, we’ve probably got a relatively fortunate situation right now. If interest rates were rocketing out through the roof, we might have a bigger problem than what we have but especially with these interest-only home loans. Because the interest rates are low, if it can be nipped in the bud and the responsibility actually works for the borrower, things can be done to make certain that other problems are averted.

Michael: Yes, that’s right. Regulators have been looking at interest-only loans for a couple of years. I think, recently, we’ve seen the number of interest-only home loans go up again. You’ve seen the announcements made by APRA, by ASIC. We’re making sure that the  home loans that are being provided are both affordable for borrowers, but also to make sure that they’re the right product for borrowers and for owner-occupiers in particular.

We think that for many of those borrowers, an interest-only loan won’t make much sense given that you do end up paying a lot more in interest over the life of the loan. Increasingly, lenders are charging more for those interest-only loans. Borrowers need to be careful about choosing an interest-only loan given the cost difference.

Ross: Michael, right now, your focus in regards to the work you’re doing, is it pointed towards the institutions to say, “Hey, make certain that you’re leaning on a responsible manner,” and I presume that would be the case, or is it towards consumers and others who might be borrowing the money and saying, “Hey, make certain you understand what you’re getting into and don’t get in over your head”? Is it a two-pronged approach or is it really concentrating on the lenders more than the borrowers?

Two-pronged approach

Michael: It is a two-pronged approach, but we regulate the lenders. In doing that, what we want to make sure is that they’re meeting their legal obligations and making sure that they are meeting their responsible lending obligations. We do want to encourage consumers to certainly think twice about getting an interest-only loan. Equally, lenders and mortgage brokers have a responsibility to make sure that the home loan that’s being provided or being recommended to the borrower is suitable and that the consumer can afford that home loan, both today and into the future, when those repayments do increase when you start having to pay back that principal amount.

Ross: Given the fact that you have to monitor this notion of responsibility of lending, do you believe as the corporate regulator that you have enough teeth, a teeth to bring this to heal if you see that there is irresponsible lending practices taking place out there bit through banks, building societies, credit unions or even through mortgage brokers?

Michael: Yes. It’s certainly been a really strong focus for ASIC in the last couple of years. We’ve done a number of industry reviews to understand where the industry was at. We identified some shortcomings. We’ve had the industry improve its practices in a number of key ways over the last couple of years. We’ve also announced court action against Westpac recently and that matter is now before the court. We do take a range of action. We’ve got a number of different tools in our regulatory toolkit and we use the tool that’s appropriate in the circumstances.

Ross: Michael, so that is the ASIC senior executive and leader of deposit takers and insurers. It’s a key issue right now.

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Household Debt, Housing Prices, and Resilience

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Housing Market Treasurer Scott Morrison

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Housing: “The Ultimate Ponzi Scheme”

John Key Bank Levy, Budget and Housing Affordability

Money Minute May 17 2017 Housing Market Back Fire

Money Minute – July 17 2017 “Melbourne the Best Housing Return”

Money Minute – June 2 2017 Housing Wobbles

NSW Housing Affordability Package Dominic Perrottet

NSW Premier Gladys Berejiklian Housing Affordability Package

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