Australian banks told to tighten lending criteria on interest-only home loans

Demand for investor home loans across Australia has reached historic highs, fuelling concerns of frothiness in the property market.
Demand for investor home loans across Australia has reached historic highs, fuelling concerns of frothiness in the property market.PHOTO: BLOOMBERG

SYDNEY (REUTERS) - Australia's markets regulator on Thursday (Aug 20) said lenders providing interest-only mortgages need to lift their standards after a probe found that lending criteria were not stringent enough.

The Australian Securities & Investment Commission (ASIC) has recommended that banks use a consumer's actual expenses to gauge eligibility instead of relying on a benchmark, and include buffers for future interest rate increases for affordability assessments.

The move is a part of a broader regulatory clamp-down on loans for homes bought for investment purposes and follows increasingly stern warnings from the banking regulator to keep annual growth in investment home loans below 10 per cent.

Demand for investor home loans across Australia has reached historic highs, fuelling concerns of frothiness in the property market. More than half of new-home loan approvals are for investment purposes, latest regulatory filings show.

ASIC announced its probe into interest-only home loans last December. It looked at 11 lenders, including the country's four major banks - Commonwealth Bank, Westpac Banking Corp, National Australia Bank and ANZ .

Following the review, all 11 lenders have changed their practices in line with ASIC's recommendations or have committed to implementing necessary changes in the coming months, ASIC said in a statement.

Demand for interest-only loans - popular with investors and those on higher incomes - has grown by around 80 per cent since 2012, but delinquency rates are still low, ASIC said.

For many, interest-only home loans can appear to be more affordable, as initial payments include interest but no principal. However, if incorrectly assessed, customers can end up taking on a loan they cannot afford to repay in the long term, particularly if interest rates rise.