Ratings agency gives thumbs-up to crackdown on interest-only loans

By |
 ASIC’s latest crackdown in interest-only loans is “credit positive”, according to a global ratings agency.
Last week, ASIC published its findings from an investigation into interest-only lending. The report also included the regulator’s recommendations to improve underwriting standards for interest-only (IO) loans. According to global ratings agency Moody’s, ASIC’s proposed recommendations for interest-only loans are “credit positive” for the mortgage market.
“The recommendations aim to improve the robustness of loan serviceability assessments for IO loans, thereby reducing payment shocks following interest rate increases and conversion to principal and interest payments,” Moody’s said.
“Additionally, ASIC’s recommendations emphasize that lenders, as part of their responsible lending obligations, must consider whether IO loans meet borrowers’ objectives, which is likely to lower IO loan use by owner-occupiers in the future given that the benefit of IO loan for owner-occupiers is not clear since they cannot deduct loan interest from taxes as investors can.”
Among ASIC’s recommendations for IO loans is calculating loan serviceability over the remaining principal and interest term of the loan, rather than the entire term inclusive of the IO period. According to Moody’s, a typical IO loan is five years, followed by a principal and interest period of 25 years.
“Calculating loan repayments on a $300,000 loan at a 5% interest rate over 30 years rather than 25 years underestimates a borrower’s monthly payment by $140,” the ratings agency said.
ASIC has also recommended that lenders should ascertain borrower-specific living expenses rather than simply relying on minimum benchmarks. Moody’s says this will reduce default risk of owner-occupier borrowers seeking an IO loan because principal and interest payments would stretch them financially given their actual level of expenses.
According to a Moody’s analysis, IO loans outperform principal and interest loans in low interest rate environments, however the trend reverses when interest rates rise, which makes these sorts of loans inherently risky.
“IO loans tend to have higher loan-to-value ratios, a key default driver, and slower prepayment rates. Additionally, borrowers with investor IO loans may rely on the sale of the property as the means of repaying their IO loans, a challenge if house prices decline, and may rely on rental income to meet their serviceability, which may not be adequate as rates start to rise.”

Can you afford to buy in this suburb? Find out how much you can borrow

Top Suburbs : revesby hts , millner , mt lawley , cardiff south , wallsend

go back
  • Dawn says on 31/08/2015 10:43:57 PM

    any move is a good move. But its a little too late. The price has locked out many deserving people!!! Now anyone who wants to sell, will expect these stupid prices, again further locking out people in the future!
    People with more than 3 houses need a 50% deposit! simple.

Get help with your investment property

Do you need help finding the right loan for your investment?

When investing in property, it is important to make sure that you not only have the lowest available rate that you can get, but also have the correct loan features for your needs.

Just fill in a few details below and we'll then arrange for a local Aussie Mortgage Broker to contact you and work out what features or types of loans are right for your needs. We'll even help with the paperwork. Plus and appointment is free.

How soon would you like a mortgage?
What is your Annual Household Income i $
Do you currently own any Investment Properties?
Do you own your own residence?
How much equity do you have in all your current properties?
First Name
Last Name
Where do you live?
What number can we reach you on?
E-mail address
We value your privacy and treat all your information seriously - you can check out our privacy policy here