The corporate watchdog has told lenders they are not breaching responsible lending rules if they switch customers’ principal and interest loans to interest only without completing a full application, a move that could help homeowners ride out the economic impact of COVID-19.
The conversion of mortgages from P&I loans to IO could free up a large chunk of homeowners’ household cash flow. In some cases, that will account for as much as around 40 per cent of a borrower’s mortgage repayments.
For example, on a $600,000 loan taken over 30 years at 2.91 per cent interest rate, homeowners could slash their repayments by $1,046 per month.
The Australian Securities and Investments Commission said the responsible lending rules would not be triggered because the mortgage repayments were lowered, not increased. However, the banks were still obliged to explain to the customers how the new structure will impact their borrowing.
Converting a mortgage to interest-only would result in paying more over the long term because the principal is not being reduced. However, this option does not inflate the loan amount like pausing a mortgage does, which capitalises interest on interest payments.
Currently, lenders still require existing customers to go through an onerous mortgage application process before they can switch.
“Variations to contracts do not trigger responsible lending obligations – those obligations only apply before a loan is entered or a credit limit is increased,” an ASIC spokeswoman said.
“ASIC’s comments have been made to lenders to confirm that responsible lending obligations are not a barrier to making variations from P&I to IO terms where this kind of change is sought by the consumer to reduce their repayments in the short term.”
The regulator said this was not issued as a guidance to lenders but a part of the ongoing conversation with them on how to assist homeowners during the pandemic.
The big four banks were contacted for comment.
Damian Percy, general manager of AFG Securities, said the lender has already started offering financial assistance to their customers on a case-by-case basis including reducing repayments to the minimum monthly figure and converting to interest-only repayments.
“Depending on the individual circumstances, AFG Securities will be offering customers a part-payment step on the way to hardship or arrears, without doing a full re-assessment,” he said.
“If a customer has reduced income, interest-only helps in the immediate term and stops the debt from increasing while the current difficult conditions continue.
“Complete non-payment is the worst position to be in but necessary for some customers. We encourage all mortgage holders to get in touch with their broker and lender as soon as they can to work together on an outcome at this very challenging time.”
Otto Dargan, managing director of mortgage brokerage firm Homeloanexperts.com.au, said switching repayments to interest-only will reduce the homeowner’s cash flow burden.
“This is very reasonable due to the high number of people who need to increase their cashflow and the need for extra funds to be injected into the economy rather than into paying off a home loan,” he said.
“Normally there would be a lot of questions for the borrower and in some cases assessing their income to confirm that they can afford the higher P&I repayments later. Clearly if a lender has to assess someone’s income then they can’t help the customers who have been affected.”
David Johnston, managing director of Property Planning Australia, said he expects most of the lenders are likely to offer this option to their customers but with a few criteria attached.
“I think lenders will still scrutinise the borrowers,” he said. “I expect lenders will set a time frame, like the mortgage pause currently on offer. So lenders can look at moving customers with P&I to IO for three months with a view of extending it up to six months.
“If this happens, it will be a big help for landlords facing rental arrears and vacancies as a result of COVID-19.”
Source- Nila Sweeney- Financial Review
