Rather than demonising interest-only loans, regulators should understand why borrowers want them, argues MoneyQuest managing director Michael Russell
APRA has recently instructed the banks that no more than 30% of new housing loans can be interest only, and ASIC intends to run tackle by increasing its surveillance of lenders and mortgage brokers to ensure the continuation of responsible lending.
Such a clampdown on interest-only housing loans should not really come as much of a surprise given the concerns stemming from a red-hot housing market and rising household debt levels.
However, has APRA responded in a manner befitting ASIC’s concerns? Here’s what we know:
- Since 2008, interest-only investment loans have fallen from circa 70% to 60%, while interest-only owner-occupier loans have risen from circa 17% to 23%.
- Interest-only owner-occupier loans make up around 40% of all interest-only loans.
- Investors prefer interest-only investment loans and principal and interest home loans given our taxation system.
- Housing loan applications are all assessed at an interest rate buffer of 2–4% higher than the actual borrowing rate.
The final point in particular is often overlooked when concerns abound regarding rising housing prices and low interest rates.
The fact remains that even if interest rates rise and housing prices fall, borrowers have been prudently assessed to be able to still meet their mortgage repayments without hardship.
This is what drives great mortgage brokers to not only deliver great customer outcomes but also to insulate our clients against both known and unknown future adverse events.
Returning to the issue of interest-only housing loans, MoneyQuest is broadly supportive of APRA intervening, but not simply abrogating it to the discretion of individual lenders.
MoneyQuest believes that any intervention should be restricted to curtailing interest-only repayments on certain owner-occupier loans. However, in doing so APRA and ASIC must be made aware of the very legitimate reasons why mortgage brokers couple some clients with interest-only periods:
- First home buyers often convert their first homes into investment properties when either upgrading or relocating as a consequence of their employment. Mortgage brokers are often asked to provide the flexibility of repayments to cater for this option and allow their clients to pay interest only on their home loan and the principal and interest differential into an offset account.
- Conversely, first home buyers who only ever wish to remain in their first home often request an initial interest-only period to give them the opportunity to fund known or unknown property improvements or repairs and then convert to principal and interest.
- Self-employed borrowers often request interest-only repayments to cater for inconsistent month-to-month incomes. The flexibility of the repayments allows them to make additional principal (or lump sum) repayments in good months and interestonly repayments in quiet months;
- Astute clients will often specifically request interest-only repayments to preserve their cash flow for what they regard as better investment options – such as investing in their business, home renovations, equities and so on.
- Many clients are naturally conservative and prefer to maintain cash buffers for life’s emergencies, and as such lean strongly towards interest-only repayments;
In short, it is ill-informed to suggest that all interest-only owner-occupier loans are irresponsible and not in a client’s best interests.
A broad-brush response from both the regulators and lenders is not the solution. Rather, taking the time to engage participants at the coalface to really understand the issues at hand will unearth sensible solutions to mitigate future concerns.
Michael Russell is managing director of franchise brokerage MoneyQuest. His 25-year career in financial services also includes six years as the CEO of Mortgage Choice, and he was previously managing director of Choice Aggregation Services