We have seen over recent months that all lenders are reviewing their products for borrowers wishing to purchase residential properties and seeking Interest Only Loans.
This has occurred to curb “heightened risk” in the housing market. The Australian Prudential Regulation Authority (APRA) has advised all lenders to tighten their criteria surrounding Interest Only Loans on owner occupied and investor properties. According to APRA, the increased scrutiny is in response to an increase in heightened risks reflected in rising house prices, passive income growth and rising household expenses.
Also, APRA has instructed banks that no more than 30% of new housing can be interest only. ASIC intends to monitor this by increasing its surveillance of lenders and mortgage brokers to ensure the continuation of responsible lending. Therefore, lenders have been placing limits on Interest Only Loans for lending to valuation ratios above 80%. Recently, some lenders have reduced their Interest Only Loans from 90% to a maximum of 80% of total purchase price. In addition to this, lenders have now reduced the previous interest only period to 5 years.
However, a finance / mortgage broker could connect an interest only home loan for their client for the following valid reasons :-
- Self-employed borrowers often request Interest Only repayments to cater for their varying month to month income streams. This flexibility in loan repayments allows them to make lump sum payments when their income levels are high.
- Astute borrowers will often request interest only payments to preserve their cash flow for other investment options e.g. investing back into their business, home renovations, equities and other hefty investments.
- First home buyers often convert their first homes into investment properties when either upgrading or relocating as an outcome of employment.
- Borrowers can be conservative and may prefer to maintain cash buffers for emergencies and hence opt for interest only.
Finally, when a finance/mortgage broker is assessing the borrower’s needs, especially if an interest only period is requested, a full needs analysis must be undertaken to ensure that the borrower’s capacity to service any borrowings are not jeopardised.
It is important to note that when lenders assess a residential loan and the customer requests an interest only period, the lender will assess the loan based on the term after the interest only period.
For example, if a 30 year loan is requested with an interest only period of 5 years, the lender will assess loan repayments based on a 25 year principal and interest term. (This may effect the overall serviceability of the borrower in question).
Tags: Interest-only Lending