Banks Announce Tougher Scrutiny On Interest Only Loans

The Commonwealth Bank of Australia is tightening up its scrutiny of interest only mortgages by carrying out enhanced screening of applicants.

It will conduct digital screening of an applicant's investment strategies, and require more information about why borrowers may need reductions in borrowing costs.

Borrowers will need to specify the reasons for taking out an interest-only loan and whether it was recommended by a broker, who are paid commission by the bank for their recommendation. It will also include an explanation of how a borrower might maximise negative gearing for a property investment.

Similarly, Westpac has recently announced plans to use Equifax, Experian and illion to provide credit reports and credit scores, allowing them to review all outstanding debts of the applicants, including drawn lines of credit, rather than just credit inquiries, and any defaults.

This increase in risk assessment comes as lenders face regulatory pressure to improve prudential standards, particularly for interest-only borrowing.

This recent move by the CBA is one of many "adjustments" to bank lending policy in recent years. Whilst a significant driver of these changes is due to APRA requirements, there has also been a Public Relations factor.

This week we received an enquiry from a prospective borrower who had historically enjoyed a good relationship with the Commonwealth Bank. He was purchasing a quality property, had a respectable deposit and ample capacity to service the loan, yet his banker of 17 years was unable to assist. Scenarios like these are the reason Equity-One is a relevant option for commercial borrowers looking for an alternative to their traditional funding sources.


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