ASIC not happy with interest-only lending standards

The Australian Securities and Investments Commission has found a "troubling" level of non-compliance with responsible lending requirements among lenders and brokers arranging interest-only mortgages.

Yesterday ASIC released the results of a review of interest-only mortgage lending by 11 lenders over two years. The review identified practices "where lenders may be at risk of not complying with their responsible lending obligations."

In 40 per cent of the files reviewed the affordability calculations assumed borrowers had longer to repay the principal on the loan than they actually did. Lenders used the full term of the loan to calculate principal repayments, rather than the residual term.

In more than 30 per cent of files reviewed there was no evidence that the lender had considered whether the interest-only home loan met the borrower's requirements.

There were numerous files where the stated objective of the borrower was "to purchase property," with no information about the reason an interest-only loan had been selected.

"Statements of this type do not support the decision to provide an interest-only home loan rather than another type of loan, and are inadequate as they suggest that the consumer did not have any objectives for the loan itself," ASIC said.

In 20 per cent of files lenders had not considered the borrower's actual living expenses when approving the loan but relied instead on "expense benchmarks". Some ignored expenditure information provided by the borrower.

In some cases other debt was not taken into account in affordability calculations.

"We were disappointed to observe that the practices of many lenders appeared to fall short of our expectations," the review said.

ASIC deputy chair Peter Kell said the regulator decided to look at interest-only lending after observing strong growth in that segment of the mortgage market in recent years.

Demand for interest-only loans has grown by about 80 per cent since 2012. In the March quarter this year the number of interest only loans was almost 20 per cent higher than a year earlier, accounting for about 42 per cent of all new home loans.

Growth in interest-only lending does not present an immediate problem (delinquencies on interest-only loans are actually lower than delinquencies on principal and interest loans) but ASIC chair Greg Medcraft said the regulator was looking at emerging risks.

Medcraft said: "We want to minimise the risk that borrowers would face difficulty making their mortgage payments in future. We want to avoid future stress scenarios."

Kell said ASIC was not asking for changes to responsible lending law. "The law as it stands allows us to push for higher standards," he said.

ASIC will be doing follow-up work with lenders and plans to release another review next year.