APRA and ASIC have separately issued guidance on interest-only residential mortgage lending: APRA focuses on the strengthening of prudent mortgage lending and risk management practices generally while at the same time ASIC continues to address responsible lending and has announced remediation by eight lenders.
The latest changes have been welcomed by the Reserve Bank of Australia.
APRA’s announcement acknowledges that while there are a range of reasons why an individual borrower might seek interest-only terms, it is concerned that at an aggregate level this creates additional vulnerabilities to ‘payment shock’ (the increase in payments when loans revert from interest-only to amortising), interest rate increases or house price falls.
APRA expects ADIs to:
- limit the flow of new interest-only lending to 30 per cent of new residential mortgage lending, and within that:
– place strict internal limits on the volume of interest-only lending at loan-to-valuation ratios (LVRs) above 80 per cent; and
– ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent;
- manage lending to investors in such a manner so as to comfortably remain below the benchmark of 10 per cent growth; and
- review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions.
In respect of serviceability, APRA considers that it is important that borrowers retain an adequate financial buffer to allow for unexpected events, especially for borrowers that have high levels of indebtedness. It says it would be prudent for ADIs to ensure that a borrower retains a reasonable income buffer above expenses to account for both variability in income or expenses and the possibility of higher interest rates.
APRA will be monitoring closely the trend in lending to borrowers with a relatively small monthly net income surplus (e.g. less than $200 per month).
APG 223 prescribes the minimum expected interest rate buffer – the higher of either at least 2 per cent above the loan product rate and a minimum assessment interest rate of at least 7 per cent. APRA views these interest rate serviceability buffers as minimum expectations – ADIs should not adopt them simply as default settings, but periodically consider whether they should be increased or otherwise adjusted to reflect the lending environment.
APRA also expect ADIs funding non-bank lenders to ensure that these loans are not growing at a materially faster rate than an ADI’s own housing loan portfolio and that the lenders’ mortgage lending standards are consistent with industry-wide sound practices.
ASIC has announced a targeted industry surveillance to examine whether lenders and mortgage brokers are inappropriately recommending more expensive (and unsuitable) interest-only loans.
In ASIC’s opinion, while interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.
The reports focus on how lenders and mortgage brokers inquire into and record consumers’ requirements and objectives to assess whether an interest-only home loan meets their requirements.
ASIC also announced that eight major lenders (including 3 major banks) will provide remediation (which may include refunds of fees or interest) to consumers who suffer financial difficulty as a result of shortcomings in past lending practices.
The eight lenders examined by ASIC have changed their practices for enquiring about expenses to determine the consumer’s financial situation and capacity to make repayments. Rather than obtaining a single monthly living expense figure and then relying on a benchmark figure to assess suitability, borrowers’ actual figures for different categories of living expenses (e.g. food, transport, insurance, entertainment) will now be obtained.
The eight lenders are:
• Australia and New Zealand Banking Group Limited
• Bendigo and Adelaide Bank Limited
• Commonwealth Bank of Australia
• Firstmac Limited
• ING Bank (Australia) Limited
• Macquarie Bank Limited
• National Australia Bank Limited
• Pepper Group Limited.