ASIC has warned that interest-only mortgages are increasingly being taken up by owner-occupiers on lower incomes.
ASIC’s report, the result of an investigation announced in December last year, found that in the December quarter the average value of interest-only home loans approved to owner-occupiers was almost 40 per cent higher than that of principal-and-interest home loans.
For investors during the same period, the average value of interest-only home loans was over 20 per cent higher than principal-and-interest home loans.
Speaking at the release of the report yesterday, ASIC deputy chair Peter Kell said the growth in owner-occupiers taking out these loans has been quite significant.
“It was just over 40 per cent of interest-only loans in the December quarter last year and a significant portion of those owner-occupiers are on what you might call lower incomes for this type of loan – $100,000 or less.
“It is important that we don’t just think about people taking out interest-only loans as wealthy investors.
“There are more owner-occupiers who are taking out these loans who need to understand what they’re getting into and that their ability to repay has been considered properly and what will happen when the interest-only period ends,” Mr Kell said.
ASIC chairman Greg Medcraft was alarmed at some of the report’s findings.
“We were troubled when we found in some cases that the borrower’s other debts were not factored into the affordability calculated,” he said.
ASIC’s review of more than 140 consumer loan files from bank and non-bank lenders identified that in 40 per cent of files reviewed, the affordability calculations assumed the borrower had longer to repay the principal on the loan than they actually did.
In over 30 per cent of files reviewed, there was no evidence that the lender had considered whether the interest-only loan met the borrower's requirements.
In over 20 per cent of files reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks. ASIC said these practices can result in borrowers not being able to afford their loan repayments in the future, particularly for interest-only loans, which have much higher repayments after the initial interest-only period ends.
“I must say it was troubling if you think that sample and that percentage of non-compliance…it’s frankly troubling.
“We will take action, we will be making some enforcements and we will be back,” Mr Medcraft said.