The Deputy Chair of ASIC, Peter Kell talks about measures to promote responsible lending in the home loan sector
ASIC cracks down on interest only loans
Ross Greenwood: Welcome back to Money News right around Australia, a really important study that’s come out today from the Australian Securities Investments Commission that works or follows work that’s been done by the Australian Prudential Regulatory Authority, the bank regulator that came in on Friday. Now just to explain, going back about 2008, so we’re talking, you know like eight-nine years ago, in Australia when loans were written about 30% of them were interest-only loans, today that’s risen to 40%. APRA on Friday said it wants to go back to 30%. As a result banks are going to make it more difficult for people to be able to get interest-only loans.
Now the attraction of an interest-only loan is quite clearly that the monthly repayments initially are less. The problem is you’re not paying back any the principal of the loan but people in need, need to try and afford to get into a home loan, they basically have been prepared to take the interest-only loan and hoping that the house price goes up in price. Eventually, they don’t have to worry about the retirements of that loan. Obviously I do.
Problem is very quickly you’ll find that that interest-only loan will actually cost you more money. Then there’s also the suitability issue and this is where ASIC comes in because it looks really very closely at the banks and whether in fact, they are selling loans that people can afford, that’s one of its key areas. The Deputy Chair of the Australian Securities and Investments Commission, Peter Kell is on the line right now. Many thanks for your time, Peter.
Peter Kell: Good evening Ross.
Ross Greenwood: Now just in regards to what you have done here, you’re monitoring the banks and the lenders on an ongoing basis to make certain that they are not creating an irresponsible lending sort of environment. Aren’t you?
Peter: That’s right. The banks and for that matter, non-bank lenders as well and mortgage brokers, all have to comply with responsible lending laws. Those laws are designed to reduce the risk that people will end up in loans that they can’t really afford or that are unsuitable for them. It places some responsibilities on people providing the loans to make sure that they’ve carefully looked at whether you can afford the loan, that they understand what your expenses and income are and that they’re recommending a loan that you understand and that’s going to be right for you.
Ross Greenwood: Okay, today you have said that there have been eight lenders that have potentially provided customers with bigger loans than they can afford, so those customers may well be offered assistance. You have also indicated these eight lenders are, I should name them the ANZ, Bendigo and Adelaide bank, the Commonwealth Bank, Firstmac limited, ING bank, MacQuarie bank, the National Australia Bank and also Pepper Group as well. Can you just explain what you’re saying that these lenders have basically been wrong in doing, you call it irresponsible lending potentially?
Interest only home loans
Peter: Well, we conducted a review of how lenders were providing interest-only home loans and we found that there were some significant shortcomings in this area. One of them was that lenders were not properly establishing what a consumer’s actual living expenses were, when they were assessing their capacity to make repayments. They were also not necessarily properly assessing the affordability of the loans in terms of being able to repay not just during the interest-only period of issue that you commented on a minute ago but also when you come off that interest-only period and your repayments go up.
What we’ve said to those lenders is you’ve got to make proper inquiries into how much those households are actually spending. What can they actually afford to add on to their expenditure by way of loan repayments? If there are people who have been provided with loans but they really ought not to have been put into, the banks and other lenders will need to make sure that they’re properly dealt with or might get some interest charges refunded or if they’re in hardship they can be dealt with.
At the moment we’re not expecting a large number of people to be in that situation because interest rates are at a very low point but we want to get in now before those rates start to go up again and people really do get into trouble.
Ross Greenwood: Okay, but then if I go and have a look at a typical loan $500,000, let’s say I use an interest rate of say 4% it’s likely to have 30 years, the typical loan would be that. Now if I take an interest-only the repayments are around $1666 per month but if I go interest– principal and interest, in other words, I am paying back some of the loan, it’s an extra $720 per month. Now a lot of borrowers would say, well I will take the cheaper repayments because it means I can still afford to live, I can actually keep the family going and that sort of thing. Where is ASIC, in particular, worried about the banks having issued so many of these types of loans?
Peter: Well, we are concerned as to whether people understand especially not just investors but owner-occupiers as well, understand that while there may be less direct cost upfront, overall you’re paying more. Say on a 30-year loan for $500,000 if there’s a five-year, interest-only repayment, interest only period, you would be paying roughly, depending on the rates at the moment but roughly say around $35,000 extra, if the interest rate was at the same level. But remember what’s happened recently is, interest rates have gone up a bit on interest-only loans.
There’s a typically a 15 to 20 basis point difference. One of the other things we’re focusing on is whether lenders and mortgage brokers are encouraging people to in effect take out more expensive loans and if that’s the case and the consumer doesn’t understand, well, we want to make sure that that’s not happening.
Ross Greenwood: To a big extent, heaven help that borrower, if say for example interest rates went up or indeed if property prices went down, they could find themselves in a world of debt in the future.
Peter: That’s absolutely correct. It’s very important therefore that when recommending these sorts of loans, that lenders and mortgage brokers fully explain the implications. If you get those sorts of outcomes and that people have, if you lack a safety margin, if they still want to go down that road but with higher interest rates now being charged for interest-only loans compared to principal and interest loans.
We want to make sure that people aren’t being put into loans that are unsuitable for them and that they fully understand the costs are over the loss of the loan and some of the assumptions underpinning the way these loans work. The growth of loans in these– of these top and interest-only loans are well outside the averages internationally. It’s, therefore, I think something that’s caught the eye of regulators like ASIC. We want to make sure that we’re not seeing overly risky lending.
Ross Greenwood: It was great to have you on the program as always. The Deputy Chair of the Australian Securities and Investments Commission with a good morning there Peter Kell as always we appreciate your time.
Peter: Thanks very much Ross.