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The corporate watchdog has released a suite of online tools to help consumers better understand the risks of interest-only mortgages.
The new tools complement ASIC’s review of loan providers' compliance with responsible lending laws.
Available on ASIC's MoneySmart website, the tools include an interest-only mortgage calculator to help consumers work out the real cost of an interest-only home loan, and an interest-only loan infographic that shows the journey of borrowers who take out different types of mortgage.
ASIC deputy chairman, Peter Kell, said while ASIC's review had found that banks and other lenders needed to lift their game to ensure compliance with responsible lending obligations, consumers can help themselves by doing their homework before taking on such a large financial commitment.
“For most Australians, a mortgage is one of the most significant financial decisions they will make in their lives,” Mr Kell said.
“While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run.
“Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages.”
Mr Kell said that anyone thinking of taking out an interest-only mortgage needs to have a clear plan of action when the interest-only period ends to ensure they can afford the repayments, which may increase significantly.
He suggests consumers who are considering an interest-only mortgage, or who already have one at present, ensure they can afford the increased repayments once the interest-only period ends, and also factor in an interest rate rise.
He reminded consumers that the principal of the loan will not reduce while they are making interest-only repayments.
Mr Kell said using an offset account to reduce the cost of an interest-only mortgage will only work if you can keep making these extra repayments without making any withdrawals.
“If you are tempted to dip into your offset account, then you might be better off with a principal-and-interest mortgage instead,” he said.
ASIC's recent probe into interest-only mortgages reinforced the fact that lenders and brokers need to meet responsible lending obligations and ensure the interest-only loans they arrange meet their customers' requirements and objectives.
“We expect that lenders and brokers arranging interest-only mortgages would do so in a way that is consistent with their customers' plans,” Mr Kell said.
On 20 August 2015, ASIC released a report of its review into how lenders provided interest-only mortgages to both investors and owner-occupiers. The review found that lenders providing interest-only mortgages needed to lift their standards to meet important consumer protection laws.
In today’s low interest rate environment, ASIC warned consumers that they should build in a buffer over the minimum repayment for any interest rate rises and increases in repayments, especially if they have taken out an interest-only mortgage.
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James Mitchell
AUTHOR
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.