ASIC to Investigate Interest-Only Loans

ASIC to Investigate Interest-Only Loans

On Tuesday 9 December 2014, ASIC announced that it will conduct surveillance into interest-only loans as part of a broader review by regulators of home lending standards.

ASIC states that it will look at the conduct of lenders in particular with regard to how they are complying with important consumer protection laws, including their responsible lending obligations.

The problem with interest-only loans is that while repayments are initially lower, that will only be in the initial interest-only period.  Judgement day comes when the loans revert to principal and interest repayment and increase in amount. Regulators are concerned that some borrowers are choosing interest-only loans solely on the basis is that that is the only way they can afford to buy the home they want to live in or alternatively, in the case of an investment property, to minimise the differential between rental income received and interest payments made.

Figures quoted recently indicated that some 45% of new loans appeared to be interest only rather than principal and interest. Interest only loans raise a raft of responsible lending and in particular suitability issues. They only work longer term if house prices and wages rise, but interest rates do not.

And yet this trend towards favouring interest-only loans is against a background where there is a dawning reality that the assumption that wages will always rise may no longer hold true. ” When The Sleeper Wakes”. – The Economist in an article “The Future Of Jobs – The Onrushing Wave“, published on 18 January 2014 wrote:

“Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently. They start from the observation that, across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen.”