Following increasing calls for lenders to convert principal and interest (P&I) home loans for investors into interest-only (IO) repayments during the COVID-19 pandemic, to act as a form of monetary stimulus, the corporate regulator has now confirmed that lenders would not be breaching the rules should they agree to do so.
The Australian Securities and Investments Commission (ASIC) has now written to lenders to confirm that responsible lending obligations are not a barrier to making variations from P&I to IO terms when this kind of change is sought by the consumer to reduce their repayments in the short term.
A change of a loan from P&I to IO can be made by varying the terms of the existing contract, as long as they are agreed to between the lender and borrower.
ASIC has reiterated that variations to contracts do not trigger responsible lending obligations, as these obligations only apply before a loan is entered into or a credit limit is increased.
However, ASIC has emphasised that it does not have a position on whether loans should be changed from P&I to IO repayments (given that this is a business decision and up to lenders to negotiate directly with customers who may be facing financial difficulty), and that consumers should ensure they understand the assistance they are getting and what is required of them after the assistance ends.
The call to help borrowers reduce their repayments has been a key point of focus recently, as the coronavirus pandemic (COVID-19) increasingly impacts the economy and job security.
While lenders and government have been releasing support and relief packages for borrowers, including mortgage repayment holidays, some have suggested that enabling more borrowers to reduce repayments by only having to pay interest would have broader benefits.
Liberal senator for Western Australia, Dean Smith, has recently been calling on lenders to switch investors from P&I repayments to IO, which he said could “be a massive monetary stimulus to the national economy”.
The government whip in the Senate suggested that “billions of dollars” are being funnelled into the banks through principal repayments each year, money which could be used by investors to spend on the economy and reduce rents for tenants instead, he said.
“This simple policy change would significantly boost our economy, which is now on its knees due to the coronavirus,” Senator Smith commented, adding that if the 730,000 interest-only loans due to expire this year could remain as IO, it could help borrowers having to “individually divert thousands of dollars from their disposable income into making principal repayments”.
“At the same time, the hundreds of thousands of investors who have been forced into converting their interest-only loans into principal and interest loans over the past few years are also individually paying thousands of dollars in principal repayments,” he said.
“If this forced interest and principal policy were reversed, billions of dollars could become available to give the economy desperately needed stimulus at no expense to either government or the taxpayer.”
Likewise, Southshore Finance director and broker Michael Coombes has suggested that the Australian Banking Association (ABA) could help bring together a policy to give investors an automatic 12-month extension on their maturing IO loans (with the option to opt out) and enable all borrowers to move from P&I to IO repayments without having to go through a full application process. This could be offered as a broader alternative to the borrower seeking payment relief for six months under the COVID-19 arrangements, he suggested.
He said: “I believe that there are many borrowers, both owner-occupiers and investors, that would prefer to keep making interest-only payments rather than seeking a payment relief, but to date this option has been denied to them.
“[This] statement from ASIC now opens the door, but it needs the banks to come to the party,” he said.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.