NAB, Westpac to add web warnings on interest-only loans

Australian Financial Review Apr 7 2017 11:00 PM

Geoff Winestock

Westpac and NAB say they are updating their online calculators of mortgage repayments to warn borrowers they could face a huge hike in monthly repayments after five or 10 years on an interest-only loan.

At current mortgage rates for investors of about 5.5 per cent, repayments for a $700,000 loan will jump from $3209 a month to $4299 at the end of the standard five-year interest-only period, a rise of about a third.

But if prevailing interest rates rise by just two percentage points to 7.5 per cent, repayments will jump to $5173 a month, a jump of about 61 per cent. The increase is far greater than for the same principle and interest loan which starts higher.

Those figures come from the front page of the CBA website but ANZ, NAB and Westpac either bury this information or do not disclose it at all. When the AFR Weekend raised the issue Westpac said it was in the process of updating its mortgage online repayment calculator "to include the repayment increases once the interest-only period ends".

NAB said it did have some of this information on its website but it would be made clearer. "NAB's online loan repayments calculator provides customers with an estimation of what their repayments may be – including the estimated impact of utilising an interest-only period versus principal and interest."

The figures are also not easy to find on the ANZ website. A spokesman said the calculator included a warning that, "interest-only loans are not for everyone and you should consider if this is the right strategy for you".

Concerns about the borrowers's ability to meet these rising repayments caused the Australian Prudential Regulation Authority last week to order banks to limit interest-only lending to just 30 per cent of total lending, down from 40 per cent at the moment.

While investors might avoid the step up in payments by selling or refinance at the expiry of the interest-only period, this assumes house prices will have risen and they can raise finance. Moreover, flipping the property is not an option for the 25 per cent of owner occupiers who take out interest-only loans.

The Australian Securities and Investments Commission conducted a review of about 11 interest-only lenders in 2015 which found banks were ignoring the risks and in 40 per cent of cases bank credit assessors assumed borrowers had longer to repay the principal on the loan than they actually did.

ASIC chairman Greg Medcraft compared the situation this week to the lead up to the US sub-prime crisis. ASIC has brought a test case against Westpac alleging lax standards on interest-only lending. A spokesman said ASIC had been working with the 11 lenders covered by the review to raise standards. "We have made it clear to industry our expectation that our findings from the review be addressed across the industry and our interest-only loan work is continuing."

Banks say they warn borrowers of the risks before signing contracts and they have tightened standards. For instance, Westpac said it now assesses ability to repay based on a theoretical interest rate of 7.25 per cent and on the schedule of principal and interest repayments which means the step-up in repayments on interest-only loans won't be a problem.

ANZ said it had reduced the maximum interest-only period for owner occupier loans to five years from 10 and had stepped up verification of customer stated expenses in relation to interest-only home loans.

At NAB, owner occupier customers can only hold interest-only loans for a maximum period of five years, and investor borrowers for 10 years. It said in September 2016, it had strengthened the tool for bankers and brokers use to work out a customers' monthly expenses for home loan applications. CBA said it always had high lending standards.