October 11, 2017 / 3:01 AM / a year ago

Australia's corporate watchdog to investigate interest-only home loans

SYDNEY, Oct 11 (Reuters) - Australia’s corporate watchdog said on Wednesday it will scrutinise individual home loan records to ensure that mortgage providers are not unfairly selling risky interest-only loans to make quick profits.

Interest-only loans are massively favoured by speculative property investors taking advantage of generous tax breaks, driving rapid gains in housing prices in recent years.

Regulators have intensified pressure on the country’s biggest banks in recent months to slow down lending, worried that excessive debt in the property market will hurt spending elsewhere in the economy and lead to financial stability risks.

The Australian Securities & Investment Commission (ASIC) said it will examine individual loans, including to owner-occupiers, to ensure that lenders are providing interest-only home loans in “appropriate circumstances”.

“The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations,” said ASIC Deputy Chair Peter Kell.

The first stage of the ASIC review, announced in April, showed that the country’s four major banks have cut back on risky interest-only loans but smaller players have offset that decline by increasing their share.

The review also found borrowers who used mortgage brokers were more likely to obtain an interest-only loan than those who went directly to a lender.

ASIC said borrowers approaching retirement continued to be provided with a significant number of such loans, expecting solid price growth to easily cover the principal when the property is resold, putting retirement incomes at risk.

Home prices across Australia’s major cities have continued to rise but the gains have tempered recently as banks cut back on lending. Sydney suffered a rare dip in September, but annual growth remained high at 10.5 percent. (Reporting by Swati Pandey; Editing by Eric Meijer)

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