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‘IO loans have always been safer’, says NAB chief economist

The argument that interest-only loans are risky is “factually untrue”, according to National Australia Bank chief economist Alan Oster.

Speaking at The Adviser’s Better Business Summit last week, Mr Oster claimed that regulatory restrictions on interest-only (IO) loans were overblown.

“I think everyone sort of sells the argument about [interest-only loans], as if it’s a regulatory thing, that they’re more risky — that’s not true in Australia. That is factually not true, but people are saying that it’s a bubble,” Mr Oster said.

The chief economist believes that as regulators increasingly favour the use of macro-prudential tools, a distinction should be made between perceived lending risks and over-stimulation in the market.

“There’s a confusion between a regulatory thing that says this is more risky and therefore I should do ‘x’ and something else that says, ‘I want to take some heat out of the market’, which is [traditionally] what interest rates did. But now that [regulators are] using [macro-prudential measures], they’ll probably sit on interest rates.”

Mr Oster added that he’s “not sure” why Australian Prudential Regulation Authority chairman Wayne Byres has raised concerns over IO lending, claiming that data suggests otherwise.

“I’m not sure, but I’m more than happy to show him some data that says it’s safer. [Interest-only loans] have always been safer,” Ms Oster continued.

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Further, the economist played down concerns over investment lending, noting that investors are better placed to limit the impact of a market downturn.

“[Investor loans were] typically safer during the GFC, because what you found was [borrowers] who had an investment property and their own house, [sold] their own house and lived in their investment property,” the economist said.

Mr Oster also claimed that there is little evidence to suggest that IO borrowers have struggled to repay their mortgage following the expiry of the principal-free period.

“You would think that there are some people who can’t afford [to pay principal and interest], and so what we look for is to see some kick-up in bad debt, but we really haven’t seen that,” Mr Oster stated.

[Related: Majors expected to ‘digest’ interest-only loan risks

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