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Interest Only Loans

Lenders Must Lift Standards for Interest Only Loans – Said ASIC

August 20, 2015

According to ASIC, Australian lenders, that offers interest only loans should lift their standards to meet important consumer protection laws. The demand of interest only finance increased by approx. 80 percent since the year 2012, as reported by ASIC.

A review was conducted by the regulator among 11 lenders including the major ones, i.e. CBA, NAB, ANZ, that resulted that the interest only loans are more popular with investors and those on higher incomes, and that delinquency rates are currently lower for interest-only home loans.

According to the regulator, lenders are often failing to consider whether an interest-only loan will meet a consumer’s needs, particularly in the medium to long-term.

ASIC’s review of more than 140 consumer loan files from bank and non-bank lenders identified:

  • In 40% 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% 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% of files reviewed, lenders had not considered the borrower’s actual living expenses when approving the loan, but relied instead on expenditure benchmarks.

ASIC deputy chair Peter Kell said, “Interest-only loans may be a reasonable option for some borrowers. However, lenders must have robust processes in place for assessing a customer’s ability to afford a loan, taking into account the increased repayments once the interest-only period ends. They should lend responsibly, and in a way that does not result in consumers taking on debt that they cannot afford, especially if interest rates rise”.

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