Senator calls on banks to extend IO periods

Following on from his call last month for lenders to convert principal and interest (P&I) home loans for investors into interest-only (IO) repayments during the COVID-19 pandemic, WA Liberal senator Dean Smith is now urging lenders to extend existing IO terms in a bid to provide borrowers with more cash flow during the crisis.

The senator, who is Chief Government Whip in the Senate, said that he had made direct representations to Treasurer Josh Frydenberg after receiving calls from finance brokers who were concerned that banks were not processing requests to extend interest-only loans beyond their original interest-only terms.

While lenders and government have been releasing support and relief packages for borrowers, including mortgage repayment holidays, some have suggested that enabling more borrowers to reduce repayments by only having to pay interest would have broader benefits. In the case where interest-only loans may be due to expire, extending this IO period would also be beneficial, the senator suggested.

Senator Smith told Mortgage Business that Treasury had also outlined that “there is no legislation, or regulation, that would prevent banks from extending customers’ interest-only periods”.

For example, in April, the corporate regulator confirmed that responsible lending obligations are not a barrier to making variations from P&I to IO terms if consumers want to reduce their repayments in the short term.

Moreover, the prudential regulator APRA recently eased its responsible lending guidance around the changing of loan terms for existing mortgage customers amid the COVID-19 crisis.

APRA revealed that while full serviceability assessments would continue to be required for new lending, it would temporarily ease guidance for changes to existing loan terms, including the conversion of a principal and interest (P&I) loan to interest-only (IO).     

“Such changes may include converting from principal and interest to interest-only, or for the extension of a loan term,” it said.

However, APRA noted that where changes to loan conditions are made that result in an interest-only period being granted without a normal serviceability assessment, APRA would expect that a “reasonable period for such an arrangement would not exceed 12 months”. 

Senator Smith said that the confirmation from Treasury and regulators would “bring much-needed clarity and reassurance to many finance brokers and their clients”, particularly as the majority of loans that have been granted COVID-19 hardship assistance have been P&I, not IO.

“With the full economic impact of the coronavirus pandemic about to hit, it was critical the finance sector got timely and conclusive advice about the loan options that can be offered to customers,” he told Mortgage Business.

”The advice provided by the Treasury demonstrates lending institutions have much greater flexibility to support their customers than people might think, or, in some cases, those institutions have indicated,” he said.

However, the senator suggested that the ball was now in the banks’ court to provide such relief to IO customers, as very few banks appear to have shifted policy around their extensions of IO terms during COVID.

Indeed, recent statistics do show that there has been a marked drop in the number of interest-only loans being written, as well as a general drop in the proportion of IO loans held at the banks.

Westpac recently released its half-year results for the 2020 financial year (1H20), which showed the bank had reduced its portfolio’s exposure to investment home loans over the period, down from 39.1 per cent in 1H19 to 37.6 per cent (making up just 29.4 per cent of new lending).

The share of interest-only loans as a proportion of Westpac’s total portfolio also fell, down from 30.6 per cent to 23.4 per cent. Interest-only loans now make up just 16.4 per cent of Westpac’s home loan flows.

[Related: Responsible lending not a barrier to switching loans to IO: ASIC]