ASIC’s review of interest-only mortgage lending reveals “troubling” results

An investigation into interest-only mortgage lending by the Australian Securities and Investments Commission (ASIC) has revealed a high level of non-compliance among lenders and brokers with responsible lending obligations when arranging interest-only mortgages.

The review covered interest-only mortgage lending by 11 lenders over a period of two years and found that several practices used by lenders were putting themselves “at risk” of breaching their responsible lending obligations.

For instance, more than 30% of files reviewed by ASIC contained no evidence that the lender had considered whether the interest-only home loan actually met the individual borrower’s requirements.

ASIC also found that 20% of lenders had not properly considered the borrower’s actual living expenses when approving the loan, while some lenders entirely ignored the borrower’s expenditure information and any other debt in affordability calculations.

ASIC Chair Greg Medcraft said that the regulator is looking to “minimise the risk that borrowers would face difficulty making their mortgage payments in the future.”

The review findings are timely given the strong demand for interest-only loans has grown by 80% since 2012. In the March quarter this year interest-only loans accounted for nearly half of all new home loans and was almost 20% higher than the corresponding quarter in the previous year.

While the popularity of these loans has increased especially among investors, there is also growing concern. Earlier this year, financial research company Fitch Ratings said that interest-only loans pose a threat to banks during a downturn, as they can potentially weaken mortgage books.

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